It's essential to life. But is water a good investment? 

People need clean water to survive, and agriculture and industry use massive amounts of water. Problems caused by population shifts, weather changes, and pollution have led to increasingly ambitious water projects springing up worldwide, creating myriad opportunities for defensive and aggressive investors alike. Perhaps because of this, recent returns in the sector have blown away those of the overall market. But can that trend continue?

Water, water everywhere?
Although two-thirds of the earth's surface is water, almost all of it is either ocean saltwater or locked up in ice. The small amount remaining -- about 2% of the planet's water -- is threatened by contamination and shifts in rainfall attributable to global warming. In addition, populations are moving to drier areas and industry is requiring water on a scale never before seen. Since 1950, the world's population has more than doubled, and water use has tripled, according to John Dickerson, manager of the Summit Water Equity Fund.

Some of the fastest-growing states are also some of the driest: Arizona, Nevada, Texas. According to the Government Accountability Office, most states expect to experience water shortages within the next decade even without a drought. The Southeast currently is experiencing a massive water shortage with no end in sight. Yet the U.S. is a wet wonderland compared with much of the world.

China, which is undergoing massive urbanization and population shifts, has about the same amount of water as Canada, with 100 times as many people. The country has relatively small water reserves and things are getting worse. In India, the situation is just as bad. Similar problems exist throughout the developing world, especially as businesses and consumers demand better-quality water.

What's being done?
There is an enormous worldwide industry involved in the selling, treatment, and distribution of water. With improved technology, water can be pumped, packaged, and distributed to needy places in ways never before possible. According to MFS, which runs a water-investment fund, the water services industry is the third-largest industry in the world, behind oil and electricity.

Where's the opportunity?
Although water is a massive industry, it is not widely followed and is underowned compared to other industries. B&S Water Digest reported recently that the water sector returned 22% in 2007, compared to 4% for the S&P 500. Water also outperformed the S&P significantly in 2006.

Unlike the oil industry, in which major companies like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and BP (NYSE: BP) provide investors with global investment opportunities, the water industry doesn't offer a few top choices. Many of the companies that sell and distribute water are utilities, and are thus highly regulated. Yet many of them have outperformed not just other utilities but also the broader market by wide margins in recent years. Moreover, they're a promising option for those looking for defensive stocks in the current choppy market environment.

An easy way to invest in the industry is with the PowerShares Water Resources ETF. The exchange-traded fund holds a number of key industry players, including Veolia (NYSE: VE), Aqua America (NYSE: WTR), and Consolidated Water (Nasdaq: CWCO). The fund returned around 17% last year.

Consolidated Water is in the business of seawater desalination. It operates plants throughout the Caribbean. I just love the idea of making seawater fresh, and its returns have been phenomenal, averaging 28% per year over the past decade.

Among individual companies, Northwest Pipe (Nasdaq: NWPX) is an opportunity of particular note. The company is the world's primary maker of large-diameter piping to help move water. It stands to benefit from a recent spate of large projects using its product.

The companies that provide solutions to the world's increasing water problems stand to reap great rewards. Regardless of economic conditions, water is the one thing you can count on everyone needing.

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