PIO - PIO: A Different Type Of Water ETF With A Technology Focus

2023-06-02 23:54:42 ET

Summary

• Invesco Global Water ETF is a long-term consideration for the global water sustainability issue.
• PIO focuses on technology solutions for water conservation and suitability, rather than just water utilities.
• Although currently rated a Hold, PIO has potential for long-term growth as technology advances in the water sector.

I like Invesco Global Water ETF ( PIO ) as a long-term consideration for the global issue its stock holdings are trying to solve. However, it is not a screaming buy at this point, so I'm rating it a Hold. But there is something different about this water ETF that I think many investors will want to know about now, in order to be in position to buy it at a better long-term valuation.

Water sustainability is an inescapable global issue. But it is also a complex one. That in itself makes a case to me for monitoring ETFs that aim to track the performance and progress of stocks that are a key part of making water available and potable around the globe.

In 2015, the United Nations adopted Sustainable Development Goals [SDG], which set targets for improving 17 so-called "core competencies" by 2030. The UN's goal is to try to allow as much of the global population as possible to enjoy the prosperity that comes from having some basic life elements that those in developed economies probably take for granted on a day-to-day basis.

The sixth goal of those 17 is "Clean Water & Sanitation."

We often take water for granted; its high degree of scarcity has gone from a sound-bite to being a true global issue to confront. I think this needs to ultimately trickle down to more attention toward, and investment in, companies that are part of the solution.

This might seem like a simple climate change issue, but that's not the case. Drought and pollution are certainly factors, but a water crisis can be as simple as rapid population growth, and not enough water to go around.

There are several water-related ETFs, but what I particularly find attractive about Invesco's PIO is that it focuses not only on the water issue, but in the key role of technology in helping to deliver solutions. When I have invested in water stocks in the past, they were really just utilities that were in the business of delivering water, instead of electricity or natural gas.

PIO ETF tracks the Nasdaq OMX US Water Index, which invests in companies that are in the business of conserving water and making it suitable for drinking, washing, etc.

An Undiscovered ETF that covers water differently

With AUM of about $265 million this PIO fits within my definition of an "undiscovered" ETF. This, despite the fact that it has been trading since 2007. So, it is apparent that this ETF and the UN core competency it targets have not rallied a huge fan base, versus many other industries and sectors.

This is a global ETF, evidenced by the fact that nearly half its assets are invested in non-US stocks. The US does make up 55% of PIO, the United Kingdom accounts for 14%, but there is no other nation that accounts for as much as 8%.

As noted earlier, this is not simply a Utilities ETF in disguise. While utilities do comprise 20% of PIO, the largest sector by far is Industrials, at a whopping 55% of assets. This speaks directly to the difference in this water ETF versus some others. It is more concerned with owning the stocks that are solving the long-term water issue, rather than the ones currently playing the role of delivery mechanism to those who do enjoy healthy water (i.e. the utility stocks).

With a weighted average market capitalization of more than $30 billion, PIO can be considered a large cap ETF, albeit with a very narrow specialization. It currently owns 48 stocks, but with the 10 largest making up just over 50% of the fund, those stocks tend to drive the returns here.

PIO is not a widely-traded ETF, despite the reasonable asset level. Its average daily volume is only around $325,000, which is less than 0.2% of AUM. Translation: the folks who own PIO tend to be longer-term holders of it.

Water companies of the type that PIO owns are not very high yielders, as evidenced by the paltry 1.8% dividend yield for the fund. It is also not particularly cheap fundamentally, with a P/E ratio on trailing 12-month earnings of around 22x.

Tech-focus has potential to turn long-term peer loser into a winner

As the table below shows, PIO is the most expensive, worst-performing ETF in the water ETF peer group I selected. So, why on earth (which by the way is 3/4 water!) am I writing about this one? Because its focus on the stocks that are using technology to try to produce better water, as opposed to the water utilities, prompts me to look at the potential PIO has to benefit from the long-term lift that technology provides to every business nowadays.

And, while I cannot currently cite an artificial intelligence-related angle here, perhaps I'll identify one at some point. Either way, if I'm going to track a water-related investment in ETF form, I prefer this more intriguing one than a utility ETF that screens down to regional water companies.

The expense ratio 0.75% may be a turn off for some investors, but not to me. I truly believe that investors over-focus on this statistic, at least when it comes to sector and industry ETFs. If an ETF does something I like, delivers it in a portfolio construction that I am attracted to, and has long-term upside potential versus the broad stock market, I frankly don't care if it costs a bit more. In investing in thematic ETFs like this one, I think we get what we pay for.

I rate PIO a hold for now, but I expect it to be a relatively low-volatility fund within the equity universe, once the market experiences recession, and many industries and sectors are, shall we say, "all wet."

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