Smart beta water ETF launches on NYSE

Aug 11th, 2016 | By | Category: Equities

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Investment management boutique Summit Water Capital Advisors, a specialist in global water investment strategies for 30 years, has launched a smart beta exchange-traded fund offering investors exposure to globally-listed equities of firms operating in the water utilities and industrials sectors.

Smart beta index tracking global water infrastructure to underlie new ETF

In a 2013 report, McKinsey Global Institute stated that global water infrastructure spending requirements could reach a cumulative total of almost $12tn by 2030.

The Summit Water Infrastructure Multifactor ETF (NYSE: WTRX) tracks the Summit Zacks Global Water Index, created in collaboration with Chicago-based index provider Zacks Index Services. The index is a proprietary factor-based reference of approximately 30 to 50 globally-listed companies which dedicate a significant portion of their business activities to the global water industry.

Firms are selected using a proprietary three-factor model that ranks companies based on Summit’s research into the aspects most relevant to company valuation and profitability in the global water industry. Constituents are weighted based on dividend yield rather than market capitalization to further enhance the overall yield of the index.

“We are excited to partner with Summit Water, an expert in the global water industry, to create this unique, multifactor index that taps into a core investment theme,” said Jamie Adams, Managing Director of Zacks Index Services. “Zacks has continued to leverage its years of investment research and practice to create this unique strategy that offers access to a global portfolio of water industrials and water utilities in a single product wrapper.”

Matt Dickerson, CEO of Summit Water Capital Advisors, added: “As opposed to passive water indices that are constructed through various measures of market capitalization, equities are selected for inclusion in the index by a proprietary formula of relevant company fundamentals including measures of price/earnings, intrinsic value, and return on capital… Through this methodology, the index targets a more balanced and representative exposure to the global water industry that encompasses several world markets and broader capitalization levels, as opposed to a less-diversified basket of the largest, most expensive stocks.”

According to Summit Water Capital Advisors, equity investment in water companies may be attractive due to the persistent demand for this precious resource. This compelling business model of perpetual demand offers consistent earnings, creating the potential for regular dividend increases.

In emerging markets, booming populations, pollution, and drought have created crisis-level shortages in some regions while most other countries still need to complete the basic framework for water and wastewater systems. In developed countries, ageing infrastructure is being required to be replaced or serviced at a sustainable rate to keep pace with a growing population. As such, a report by management consultants McKinsey Global Institute in 2013 stated that global water infrastructure spending requirements could reach a cumulative total of almost $12tn by 2030.

As of 30 June 2016 the index has significant country exposure to the United States (24.2%), the United Kingdom (15.0%), Switzerland (7.3%), Japan (5.4%) and Canada (5.2%). The index is primarily composed of small cap (45.4%) and mid-cap (45.0%) companies, but there is also some exposure to large-caps (9.6%). There are currently 44 companies comprising the index with the top holdings being Enercare (5.2%), HomeServe (5.0%), Uponor (4.9%), GWA Group (4.1%) and TTW (4.0%).

The ETF has a total expense ratio (TER) of 0.80%.

In the US there are several ETFs which invest in the equities of companies operating in the water industry.

The PowerShares Global Water Portfolio (NYSE Arca: PIO) tracks the NASDAQ OMX Global Water Index, a reference for globally-listed companies involved in the water industry. The fund has assets under management (AUM) of $200m and a TER of 0.76%.

The Guggenheim S&P Global Water Index ETF (NYSE Arca: CGW), tracking the S&P Global Water Index, invests in approximately 50 globally-listed firms. The fund has AUM of $420m and a TER of 0.63%.

While the PowerShares Water Resources Portfolio (NYSE Arca: PHO), which tracks the NASDAQ OMX US Water Index, invests specifically in US-listed companies, the fund is fairly significant with over $700m in AUM. The ETF invests across a range of industries within the water ecosystem and has a TER of 0.61%.

Additionally, the First Trust ISE Water Index Fund (NYSE Arca: FIW) tracks the ISE Water Index, a reference for US-listed firms  that derive a substantial portion of their revenues from the potable and wastewater industry. The fund has AUM of $142m and a TER of 0.57%.

UK-based investors may be pleased to know there are several UCITS funds currently offering exposure to the global water industry.

The iShares Global Water UCITS ETF (LSE: IH20) invests in 50 global companies related to water businesses through tracking the S&P Global Water Index. The fund has $440m in AUM and a TER of 0.65%.

The Lyxor World Water UCITS ETF (LSE: WATL) tracks the SGI World Water CW Index. The fund trades in Sterling, has AUM of £345m and a TER of 0.60%.

The PowerShares Global Water UCITS ETF (LSE: PSHO) tracks the NASDAQ OMX Global Water Index, trades in euros, has AUM of €4m and a TER of 0.75%.

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