Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect water-related companies to thrive over time, because clean water is so essential to life, and water-related services are likely to always be in demand, the Guggenheim S&P Global Water Index ETF (NYS: CGW) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is 0.70%. That's higher than the typical ETF, but lower than the typical stock mutual fund. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed reasonably well, outperforming the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 8%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several water-related companies had strong performances over the past year. Water utility Aqua America (NYS: WTR) , for example, gained 16%, making strategic acquisitions and selling off some businesses. It also expanded into a potentially lucrative new direction via a joint venture supplying water to controversial natural-gas fracking operations. It sports much higher profit margins and more consistent earnings than many of its peers.
Pentair (NYS: PNR) , up 6%, is seeing its revenue growth accelerate, and has some investors excited about its merger with Tyco's flow-control business, which should help Pentair cut costs significantly while expanding into emerging markets such as Asia. It will also double the company's size. Pentair has been busy developing new products, too, such as improved valves and water filtering systems.
California Water Service Group (NYS: CWT) , up 3%, offers investors a dividend yield near 3.5% and has been raising its dividend for 45 consecutive years. It hit a bit of a speed bump recently, due to a delay in revenue collection, rising benefits costs, and increased interest expenses. But it also boasts very high customer satisfaction, and high quality marks for its water.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. France-based Veolia Environnement (NYS: VE) sank some 53%, largely due to its exposure to troubled Europe. It has reduced its dividend, but it's still yielding more than 6%, an ample reward for patient investors. It's the largest publicly traded water treatment company, and has been reducing its debt and focusing more on its core operations. It's inking some promising contracts abroad, too, such as in China.
The big picture
Demand for water isn't going away anytime soon -- or ever! A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Water is a defensive business, and defensive stocks can help you sleep at night. So can the companies our analysts present in our special free report, "3 American Companies Set to Dominate the World."
At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you canfollow on Twitter, owns shares of Veolia, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of California Water Service Group.Motley Fool newsletter serviceshave recommended buying shares of California Water Service Group, Veolia, and Aqua America. The Motley Fool has adisclosure policy.
We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.