It's easy to make the case that select water stocks -- such as the leading U.S. water utility, American Water Works (NYSE:AWK) -- have attractive long-term growth potential.

The world's fresh water supply is limited and demand should grow as the population increases and as more people move into the middle class. In the U.S., huge amounts of money need to be spent to upgrade our largely old and deteriorating water infrastructure, and in many parts of the developing world, infrastructure needs to be put in place. 

If you're interested in water stocks but don't want to bet on just one or two players in this broad space, you have another option: exchange-traded funds (ETFs). Water ETFs invest in a basket of companies that derive significant revenue from water infrastructure, water management, water purification, and so on.

A droplet of water falling into a body of water and causing a ripple.

Image source: Getty Images.

There are six global water ETFs -- but just how good are they? 

ETF

Total Assets

Number of Holdings 

Inception Date

Expense Ratio

YTD 2017 Return 

3-Year Return

PowerShares Water Resources (NASDAQ:PHO)

$841 million

36

December 2005

0.62%

 23.3%

19.6%

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

$612.3 million

55

May 2007 

0.64%

26.1%

32.7%

First Trust Water ETF (NYSEMKT:FIW)

$294.2 million

37

May 2007

0.57%

24.2%

49.2%

Power Shares Global Water 

$190.8 million

43

June 2007 

0.75%

25%

15.6%

Summit Water Infrastructure Multifactor ETF**

$6.3 million

"Generally between 30-50"

August 2016 

0.80%

25.9%

N/A

Tortoise Water Fund** 

$3 million

35

February 2017 

0.40%

19.3%*

N/A

S&P 500

--

-- 

-- --

20.3%

36.5%

Data source: Yahoo! Finance and YCharts. Data as of Dec. 1, 2017. *Since fund inception. **Not included in further analysis because history is limited.

Here's a look at how the four water ETFs that have been around for some time have performed since the newest one of them, PowerShares Global Water, started trading nearly 10.5 years ago. 

PHO Total Return Price Chart

Data by YCharts.

This long-term chart is reason enough, in my opinion, for investors to pass on PowerShares Global Water, PowerShares Water Resources, and Guggenheim S&P Global Water. Any individual stock or any sector within the stock market can underperform over the short and intermediate terms for various reasons. However, while there may be some exceptions, investments that have considerably underperformed the broader market over the long term generally don't deserve a place in investors' portfolios. 

Diving into First Trust Water ETF

First Trust Water ETF has outperformed the market over the long term (as well as the short) and deserves a look. Like the other water ETFs, First Trust Water is an index fund, meaning its goal is to track the performance of an underlying index. Here are its top five holdings:

Holding No. 

 Company

Market Cap 

Headquarters

Weight (% of Portfolio)

 1

 IDEX Corp. 

 $10.2 billion

 U.S. 

 4.01%

 2

 Pentair 

 $12.8 billion

 U.K.

 3.98%

 3

 A.O. Smith 

 $10.8 billion

 U.S.

 3.97%

 4

 American Water Works

 $16.3 billion

 U.S.

 3.97%

 5

 Roper Technologies 

 $26.7 billion

 U.S.

 3.97%

Data sources: First Trust Water ETF and Yahoo! Finance. Data as of Dec. 1, 2017.

A quick look at these holdings:

  • IDEX primarily designs and produces pumps, flow meters, other fluidics systems and components, and engineered products.
  • Pentair is a diversified industrial manufacturing company with water and electrical segments. Its water business designs, produces, and services products for water filtration, separation, and flow applications for various markets.
  • A.O. Smith manufacturers heaters and boilers for the residential and commercial markets. The company also has a small, but growing, consumer water-treatment business in the U.S. and China. 
  • American Water Works is the largest investor-owned water utility in the U.S. It provides regulated water and wastewater services in 16 states, in addition to providing market-based services in another 31 states and Ontario, Canada. 
  • Roper Technologies designs and develops software and engineered products. Its water-related products include fluid handling pumps, flow measurement and metering equipment, and water meter reading products. 

Investor takeaway

Most investors who want exposure to the water space would be better off choosing one or two top water stocks than investing in a water ETF. Many of the water ETFs illustrate the concept of "diworsification," a word coined by famed money manager Peter Lynch to describe the negative aspect of diversification. American Water Works, A.O. Smith and industrial equipment manufacturer Xylem are all good choices, with American Water being the best choice for folks who like dividend-paying stocks, as it pays a 1.82% dividend. 

Those investors who'd rather buy a basket of water stocks might want to further explore First Trust Water ETF, as well as the relatively new Tortoise Water Fund. While I didn't dig into the latter, I like its top ten holdings (Pentair, A.O. Smith, American Water Works, Xylem, and the U.S. water utility Aqua America are its top five holdings).

 

Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.