World Water (WAT) : New highs in sight?

The Lyxor WAT ETF (UCITS), created in 10/2007 is listed in Euro on Euronext and replicates the World Water Index CW Net Total Return index which is calculated by Dow Jones from a selection of values ​​made by SAM (Sustainable Asset Management, a management company specializing in sustainable development created in 1995). Stocks ​​are weighted by market capitalization, but to maintain effective diversification, no stock can weigh more than 10%.

The index is revised every 6 months and rebalanced quarterly. It is a global index composed of 30 stocks, of which 48% are quoted in USD and only 6% in Euro, so the currency risk is significant.

The costs of this ETF are 0.6% and the AUM is approximately € 520M. The replication method is indirect (via a swap) and there is a dividend distribution method.

Alternative ETFs: IH2O (iShares in USD), PHO (Powershares in USD), CGW (Guggenheim in USD).

 

Index & components

The WAT tracker gives the investor access to a basket of 30 international securities specializing in the production and distribution of water.

These values ​​are for 44% US, and for the other half Asian (of which Japan 8%, Corea 2%) and European (of which UK 18%, Switzerland 17%, France 6%).

This ETF is listed on the Paris Stock Exchange, but with a high exposure to foreign currencies (especially USD, Pound Sterling and Swiss Franc). Companies with different activities are included in this index: there are specialists in water distribution and utilities (Veolia, American Water Works ...), companies specializing in technologies related to the water cycle who manufacture pumps and filtration and distribution systems (Xylem, Pentair ...), while other companies are more exposed to construction (Plumbing...).

The historical performance of this ETF is clearly positive since its launch in October 2007 (multiplication by more than 2x) and higher than that of the S & P500 and Stoxx600, which can be explained by the theme itself which benefits from powerful long-term catalysts (demography, urbanization, development of emerging countries), but also by financial dynamics: these companies have usually a very high capital structure that involves significant debt, they are therefore sensitive to interest rates.

The fall in interest rates, which has increased significantly since the 2009 financial crisis, has had a very positive effect on these companies, which have been able to finance their investments at a lower cost. A lasting and unfavorable change in interest rates could end up being negative for the sector.

This theme is promising for the long term, as the scarcity of resources coupled with the heavy demographic and urban trends offer a considerable market for these companies.

 

Latest developments

After 6 years of uninterrupted growth, the Water World index posted a drop of 15.4% in 2018, which was linked to the fear of a FED’s more restrictive policy, and less access to credit. However, the index has rebounded by 16% since the beginning of the year due to a FED’s change of  policy, and thanks to industrial stocks which had fallen the most last year because they are more dependent on the investment cycle than utility companies, which are more linked to inflation and long-term interest rates, because of strong financial leverage over time.

The long-term factors are positive for the sector, but the momentum of the water theme remains conditioned by the economic cycle and monetary policy.