Water Water Everywhere, but Not a Drop to Spare

Clean water is a commodity taken for granted by many. In many parts of the world, clean water is not so easy to come by, and many charities and worldwide organizations devote their time and funds to making sure this human necessity is available in these places. According to the World Health Organization 768 million people don't have an improved water source for drinking, and 185 million people still rely on surface water for daily needs. If you're looking for a good social cause for investment, your cup runneth over!

The astute Foolish investor can capitalize on this basic human need by investing in an ETF totally dedicated to water resources. Today's drought conditions in California may intensify focus on water in the short term, but in the long term, the ever-increasing population will also accelerate water demand. 

An ETF that fits the bill
PowerShares Water Resources  (NYSEMKT: PHO  ) is heavily concentrated in U.S. and North American industrials that create products to purify and preserve potable water. 90% of this fund's assets are invested in common stocks and ADRs (American Depository Receipts) of companies that comprise the NASDAQ OMX U.S. Water Index. The performance of this fund over a one-year period shows that it is closely tied to this index.

Source: Invesco

The one-year performance of both the index and this fund are sharply higher than the three- and five-year performance, which this Fool believes is indicative of the increased focus on water as well as the well-publicized California drought. 

PHO holdings
The holdings of this fund are allocated as 67.05% industrials, 17.85% utilities, 8.64% health care, 4.62% information technology, and 1.83% materials. The allocation toward industrials provides the future growth potential of this fund as new and more technologically savvy methods of water purification are developed.

One of the top holdings is a company called Xylem (NYSE: XYL  ) ,  which is a major supplier for water treatment plants of pump systems, controllers, waste water treatment equipment, and analytical equipment. Xylem's products are sold in 150 countries, and includes products for desalination and water reuse as well as public utility-type equipment (meaning drought conditions will enhance demand). This stock beat earnings estimates in February and raised its dividend by 10%. Its pumps were used to pump flood waters out of New York City tunnels during Hurricane Sandy.  

Another large holding is aptly named Waters Corp (NYSE: WAT  ) , a large Massachusetts-based analytical instrumentation and software company whose products are used to analyze the safety of drinking water by looking at the amount of pesticides, endocrine disruptors, pharmaceuticals, and other harmful chemicals present.  Waters is the top player in the $3 billion liquid chromatography space -- a technique long used by chemist to determine composition of liquids and impurity counts. 

Long-term outlook
Although some may argue that these results are just a "splash in the pan" (to intentionally mix my metaphors), I believe that water gains are as sustainable as the flow of water each company strives to create. Why? First, the population is increasing at an alarming rate, which intensifies the need for potable drinking water as well as the need for water for crops and manufacturing uses.

Second, meteorologists are warning that super storms will become more frequent in the coming years; each super storm has created urgent need for drinking water, as well as water pumping and purification equipment. Last but not least, focus upon the quality of our drinking water has led a public outcry for better quality drinking water not only in America, but in many other civilized countries as well.

Invest in something everyone needs and will never stop needing, and you should have a winner. 

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