Water: Good as gold for investors

Water.

It's the global commodity that most deserves a place in your portfolio -- ahead of gold, iron ore, copper or oil, I'd argue.

And it's also the toughest to invest in. Water isn't traded -- in fact, in many countries it's not even metered. Pure-play water companies are hard to find, especially if you rule out the obvious but slow-growing water utilities. The leading companies in big swaths of the market are industrial conglomerates in which water has historically made up a relatively small share of revenues.

For example, among the top 10 companies in the Guggenheim S&P Global Water (CGW +0.27%, news) exchange-traded fund, which is designed to track the Standard & Poor's Global Water Index, I'd call five of them water utilities and two diversified industrial companies with a presence in water. That leaves only three, or about 30% of the ETF and index, anywhere near the sweet spot in water. (More about what the sweet spots are later in this column.)

As the individual parts of the water market get bigger, investors are seeing a wider array of pure plays. For example, orders for desalination equipment to convert seawater into water for drinking and industrial processing hit $5 billion in 2011, according to Global Water Intelligence. Those orders are forecast to hit a record $17 billion in 2016.

And it doesn't hurt that both companies and investors see water bucking the trend of other environmental sectors. As of Aug. 29, the Guggenheim S&P Global Water ETF was up 8.85% from last year, versus a brutal 38.53% drop for the PowerShares WilderHill Clean Energy (PBW +1.82%, news) ETF.

A resource you can't live without

You can put together the investment case for water from the headlines.

Supply is falling. Droughts devastate -- depending on the year -- the United States, Australia, India, China and Argentina. Evidence mounts that the global climate is becoming more volatile, putting historic water-carrying weather patterns such as India's monsoon season at risk. Supplies of clean water shrink as underground aquifers are mined for limited supplies of water accumulated over millions of years. Clean water supplies also dwindle as existing sources are polluted by farm chemicals, inadequately treated industrial discharge and untreated urban sewage.

Amid all this, demand is rising. According to data from the United Nations, withdrawals of fresh water have tripled in the last 50 years, with demand for fresh water increasing by 64 billion cubic meters (64 trillion liters, or 16.9 trillion gallons) a year. Some of that is from global population growth of about 80 million people a year, at current rates. Some is from changes in lifestyles and eating habits that increase per-capita water consumption. And some is from soaring demand for clean water from farmers, industry and city dwellers. Add in increases in energy production (because tapping sources such as oil sands and biofuels requires more water than extracting from traditional sources of oil and natural gas).

The math is pretty simple: Falling supply and rising demand will drive the price of the commodity higher. Want to know where to invest in water? Follow the flow. In this column, it takes me to 10 water stocks in three categories.