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How to Invest in Water Using the Guggenheim S&P Global Water Index ETF (CGW)

February 27th, 2016

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This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

Image credit:hxdyl/Shutterstock.com

The following is a guest post by JohnSzramiak who runs Vintage Value Investing, which is one of the few investing blogs worth reading. -Jin

The United States' Aging Water Infrastructure

Thecurrent crisis in Flint, Michigan- where lead from the city's aging pipe system has leachedinto the watersupply - has drawn national attention to the nation's aging water infrastructure.

Bysome estimates, more than $1 trillion in upgrades over the next 25 years are needed to the vast system of mostly underground pipes in the U.S., and experts are saying concerns over the aging infrastructure can no longer be ignored. In fact, TheASCEbelieves that most of our drinking water infrastructure is nearing the end of its useful life and gave the country's drinking water and sewage infrastructure a "D" grade.

Without upgrades, the U.S. economy is expected to shrink by $416 billion due to increased costs to households, loss of worker productivity, and increased wasting of water... and more events like Flint, Michigan. Other developed countries are facing a similar situation.

What kind of investments does the country need?

New and improved treatment plants, expanded pipes, and better waste-water networks.

The ASCE recommends financing these projects through government loans, private bonds, and through the establishment of a federal water infrastructure trust fund.

Additionally, bills are in process in various state capitals that could open the door to the privatization of water utilitiesin an effort toimprove thequality and operations of poorly managed public water systems(like the one in Flint). In a privatization, the states that own their own water utility companies would sell those companies to private investors.

Investing in Water Infrastructure Companies

One way to benefit from these coming changes is to invest in the stocks of individual water utility companies. There are many small water utility companies, and further privatization could lead larger companies to buy them out, which would make those companies stronger while making more money available for infrastructure development.

The implementation of this strategy is already partly underway. American Water Works Company (NYSE: AWK), the largest publicly traded water and waste service provider in the U.S., bought 13 smaller utilities in 2014, and the second largest utility, Aqua America (NYSE: WTR), has bought 300 utilities over the past two decades.

Other potential investments include the stocks of companies that actually build water infrastructure and equipment, such as:

  • Calgon Carbon (CCC): Amanufacturer ofproducts that remove contaminants and odors from liquids and gases, both for industrial, municipal, and consumer markets.
  • Mueller Water Products (MWA): One of the largest manufacturers and distributors of fire hydrants, pipe fittings and valves in North America.
  • Xylem (XYL):A manufacturer ofpumps, valves and analytic equipment used to move, test, and treat water in more than 150 countries.

There are a tonof different individual water companies to research, and a lot to learn about how the industry works.

You don't have to worry though. That's why God created index funds.

The Guggenheim S&P Global Water Index ETF (NYSE: CGW)

By now, everyone should be aware of the advantages of investing in an ETF - namely diversification at a very low cost. If you don't know what an ETF is, then check outWhat's an Index Fund?

TheGuggenheim S&P Global Water Index ETF(NYSE: CGW) is one of the best ETF's to invest in if you want to buy stocks in many different water-related companies. CGWtracks theS&P Global Water Index and, at an expense ratio of only 0.64%, is one of the cheapest on the market.

TheS&P Global Water Indexitself tracks50 companies from around the world that are involved in water related businesses.

TheS&P Global Water Index (and by extension theGuggenheim S&P Global Water Index ETF)is comprised of approximately 50 securities selected based on the relative importance of the global water industry within the companys business model. The Index is designed to have a balanced representation from different segments of the water industry consisting of the following two clusters:

  • _25 Water Utilities and Infrastructure companies: w_ater supply, water utilities, waste water treatment, water, sewer and pipeline construction, water purification, water well drilling, water testing
  • _25 Water Equipment and Materials companies:_water treatment chemicals, water treatment appliances, pumps and pumping equipment, fluid power pumps and motors, plumbing equipment, plumbing pipes, fluid meters and counting devices

To qualify for inclusion in the ETF, the company must be worth at least $250 million, and $100 million worth of stocks must not be held by company insiders. The index is rebalanced semi-annually. No single stock may have a weight of more than 10% in the index at each rebalancing.

38% of the ETF's holdings are located in the U.S., 18% in the U.K., 10% in France, 8% in Switzerland, and 8% in Hong Kong, with the balance distributed throughout the rest of the world.

Guggenheim S&P Global Water Index ETF - Top 10 Holdings
Ticker
Name
Shares
Market Value
Weight

GEBN

GEBERIT AG

78,606

$27,755,478

8.09 %

AWK

AMERICAN WATER WORKS CO

382,586

$24,833,657

7.24 %

UU/

UNITED UTILITIES GROUP PLC

1,447,265

$19,636,424

5.72 %

VIE

VEOLIA ENVIRONNEMENT SA

766,227

$18,401,778

5.36 %

PNR

PENTAIR PLC

374,450

$17,644,084

5.14 %

DHR

DANAHER CORPORATION

199,822

$17,314,576

5.05 %

SVT

SEVERN TRENT PLC

505,790

$15,705,268

4.58 %

SEV

SUEZ ENVIRONNEMENT CO

756,768

$13,982,044

4.08 %

XYL

XYLEM INC/NY

377,452

$13,569,399

3.96 %

WTR

AQUA AMERICA INC

375,259

$11,831,916

3.45 %

Click here to see all 50 of CGW's holdings.

Guggenheim S&P Global Water Index ETFPerformance

Guggenheim S&P Global Water Index ETF -Historical Performance

The chart above shows CGW's historical performance over the past 7 years and the chart below compares CGW's annual price returns to the fund'sNAV and the returns on the S&P 500.

Driven by underperformance in 2011 and 2014, CGW has returned 3.7% annually since 2008, compared to 7.4% for the S&P 500.

Stocks in the Guggenheim S&P Global Water Index ETF is currently trading at a 21 times last years earnings, which is above thestock market's long-term meanof 15.6 timesbut in line with the 21.4 times that the broader S&P 500 index is currently trading at. This suggests that the ETF is more expensive when compared to the historical norm, but is similarly priced compared to the broader U.S. stock market.

Summary

So is theGuggenheim S&P Global Water Index ETF the right investment for you? I'm afraid I can't answer that question - only you can decide.

But if you believe in the thesis that water and water-related businesses aregoing to playmore and more of a critical role in the future of this world, then theGuggenheim S&P Global Water Index ETF couldbe one investment that you might want to dive right into.

John Szramiakruns Vintage Value Investing, a website dedicated to revealing and teaching the secrets of legendary value investors like Ben Graham, Warren Buffett, and Charlie Munger. John has a Bachelor of Science degree in Finance and Economics and currently works for a financial firm in Boston, MA.

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.