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 as our planet's growing population keeps demanding clean water, the First Trust ISE Water Index ETF (NYSE: FIW) 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 water ETF's expense ratio -- its annual fee -- is 0.6%. The fund is fairly small, 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 rather well, beating 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.
What's in it?
More than a handful of water-related companies had strong performances over the past year. Mueller Water (NYSE: MWA), for example, surged 100%. It had been challenged in recent years by struggling municipalities, but a recent earnings report was impressive, with management bullish about increased construction work. Municipalities are not a lost cause, either, as deteriorating infrastructures will eventually need to be updated. Mueller just signed a two-year deal with New Orleans that could generate $5 million in revenue.
Aqua America (NYSE: WTR) advanced 21%, making strategic acquisitions and selling off some businesses. It's also involved, via a joint venture, in supplying water to controversial natural-gas fracking operations. It sports much higher profit margins and more consistent earnings than many of its peers, pays a dividend yield of about 2.6%, and has been upping its dividend for 20 years in a row. It may not be the biggest bargain in water right now, though.
Agilent Technologies (NYSE: A), maker of bioanalytical and measurement equipment for the water industry, among others, gained 8%. It just reported a weak third quarter, blaming a sluggish economy and projecting slower growth. My colleague Anders Bylund wonders whether it might simply be losing market share to smaller rivals, though.
Other companies didn't do so well last year but could see their fortunes change in years to come. Veolia Environnement (NYSE: VE), for example, shed 5%, rebounding after being whacked largely by slowdowns in Europe, where it's based. Even after a dividend cut, it still offers an appealing dividend yield near 6.3% -- but some wonder whether that's in danger, given the company's debt load. Veolia has been cutting costs and selling some assets to address that. It has also been shifting its focus from waste to water and is a major player in the water world.
The big picture
Demand for water isn't going away anytime soon. 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.
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