By Rob Isbitts
Be aware: The primary time we write about an ETF, we concern an ETF profile report. Use this hyperlink to see that profile, as it is going to present useful background for this ETF replace report.
Overview of Key Elements
Invesco S&P International Water Index ETF (NYSEARCA:CGW) features a diversified group of water utilities, infrastructure and water gear corporations. There has actually been no change within the secular points relating to the scarcity of potable water, and danger of famine. It’s nonetheless uncomfortably excessive in lots of components of the world.
But as this chart exhibits, CGW is off to a flying begin this yr, particularly when evaluating it to the Utilities sector of the S&P 500. CGW has an almost 40% allocation to Utilities, and many of the remainder of this ETF is invested in industrial shares. But each of these sectors are lagging the S&P 500, and CGW has outperformed all the above market segments. What’s that every one about, and what does it imply for the remainder of 2023 and past?
In investing, the straightforward reply is commonly probably the most easy. CGW’s current efficiency spurt is the so-called small cap and mid cap impact in play to begin the yr. The broad market has carried out fairly nicely till very lately, however smaller firm shares have been leaders. In actual fact CGW’s efficiency lately tracks the S&P Midcap Index fairly carefully.
It is a nice reminder to ETF traders that extra concentrated funds are value a robust look. Their restricted variety of holdings permits for a neater look-through, in the identical manner that an investor may analyze the person inventory holdings in a portfolio. Within the case of CGW, its largest parts have typically not carried out nicely as of late. However in an ETF with 53 holdings, however the place the highest 25 account for 86% of belongings, it solely takes a small batch of these higher-weighted shares to hold the ETF at occasions. A number of of CGW’s holdings with market caps of beneath $10B have produced returns of over 20% this yr. And, this ETF’s world nature has added return from its European shares, as that market section has rallied on a pointy drop (over 10% from its 2022 peak) within the US Greenback Index.
That is all to say that CGW’s short-term efficiency is actually useful, however it doesn’t erase a number of the extra sustainable points it faces for the remainder of 2023 and into subsequent yr. The broader market is weak and getting weaker, and my evaluation of CGW’s value sample signifies that it has been contaminated with the identical sickness that has lately befallen the broader inventory market. Particularly, that it has repeatedly failed to interrupt into new excessive floor, with the $50 space proving to be sturdy resistance. This sort of “pretend out-breakout” as I name it’s symptomatic of an surroundings that also suffers from over-exuberance on each bear market rally. That is one crucial aspect for our case that CGW remains to be a promote.
- Brief-Time period Score (subsequent 3 months): D
Lengthy-Time period Score (subsequent 12 months): D
(information – A=Robust Purchase, B=Purchase, C=Maintain, D=Promote, F=Robust Promote)
Present Bull Case
However regardless of the present macro-market malaise, this drawback isn’t going away. Because the graphic under exhibits, water shortages and availability of fresh, drinkable water (“potable water”) are an ever-growing world concern. As I see it, this makes CGW a must-follow for my portfolio methods. Nonetheless, that does not imply it’s a well timed holding.
Present Bear Case
The aforementioned technical analysis-related elements are only one a part of my bear case. CGW’s present portfolio sells at greater than 24x trailing earnings, and at greater than 3x guide worth. That paints an image of a bunch of corporations which might be overvalued, for now. And, whereas some traders might have a look at the presence of utilities, a regulated and sometimes high-yield inventory sector, that’s not the case with CGW. It solely yields about 1%. So, the bull case right here is more likely to be made solely at a considerably lower cost level than the place it trades at this time.
Present Funding Opinion
There’s lots to love right here from a mission standpoint, and the function that these companies ought to in the end play in fixing a serious long-term concern for the planet. However investing is a mixture of discovering good investments, proudly owning them when they’re priced nicely, and promoting them once they now not are. Thus, we’re leaving our Promote ranking for CGW intact for now.
* These ETF Grades and Rankings are a proprietary ETF analysis system developed by Rob Isbitts and his staff at Sungarden Funding Publishing, who publishes on Looking for Alpha beneath the model identify, “Fashionable Earnings Investor.” You’ll be able to learn extra about Mr. Isbitts’ skilled background in his Looking for Alpha profile web page, and on the profile web page for Fashionable Earnings Investor.