As Los Angeles battles the rest of the west for water rights — and aquifers everywhere start to dry up — it’s no surprise that water is a hot commodity. But lately, experts agree, the market is especially robust.

“It’s essential to human health, a safe environment and economic development — and, well, there’s no substitute, so it’s a basic supply-and-demand issue,’” says Steve Hoffman, president of WaterTech Capital, an investment firm that tracks this burgeoning sector. Why is it that water has become, as many have said, “the next oil”? Access to clean drinking water has simply failed to keep pace with population growth, especially in the developing world.

“Right now, 1.2 billion people are without access to safe drinking water,” says Erik D. Olson, senior attorney and director of the Natural Resources Defense Council’s Drinking Water Project. The United Nations has pledged to cut that number in half by the year 2015, which will require tremendous investment by governments of developing countries, the nations that aid them, businesses that offer clean water technology, and NGOs. Furthermore, rapid development in China, India, and elsewhere is driving demand for new water infrastructures to support those emerging economies.

At the same time, existing water systems in western nations are wearing out. In the U.S., nine out of 10 water utilities are still using World War I–era technology, according to the NRDC, and bringing all of it up to date will cost around $500 billlion, according to one estimate. Removing contaminants like arsenic and perchlorate from the domestic water supply is also emerging as an important, and costly, necessity.

As a result of this pent-up demand, companies that are developing technology to treat, filter and deliver clean water — and even water utility companies themselves — have become the latest “next big thing.” “Water is hot right now,” says Francesca McCann, a vice president at Stanford Washington Research Group who specializes in analyzing the water industry. Last year, WaterTech launched the Palisades Water Index (ticker symbol: ZWI) to track this potentially big moneymaker (it works in roughly the same way that the NASDAQ represents tech stocks). Comprising publicly traded stocks that stand to benefit from the demand for safe drinking water, sustainable use and improved industrial processes, the Palisades Index is now up about 18 percent since its inception (compared to around three percent for the S&P 500), with companies that are developing new technology leading the way. In December, the investment firm PowerShares launched a portfolio, called Water Resources, to mirror the Palisades index so that investors can easily get in on the action.

But is it green to invest in these companies? “It is pretty earth-friendly — and human-friendly, of course,” says Olson. “There’s no such thing as a perfect technology, but on balance, these are sustainable, and they’re likely to play a role in fixing important environmental problems. And they’re helping people — you don’t want 8 million kids dying each year because they don’t have access to clean drinking water.”

Doug Wheat, director of SRI World Group, an organization that provides information on socially responsible investing, agrees: “Water Resources was developed to make money, not necessarily with social and environmental factors in mind, but still, in general, it’s good for both people and the earth.”

Of course the impressive growth — and considerable buzz — in water may make a person worry that it’s a little late to get in on the ground floor. But financial experts believe that this is anything but a flash in the pan. “Water is a basic, fundamental human need that’s not going to go away,” says McCann. “It’s true that people get excited over hot, new technologies, but truly, it will take several years to implement them and the need will be there for a long time, so this is the kind of investment that should be considered a longer-term hold.” Whether water is the next oil or not, putting money into clean water could be just the thing to turn your portfolio into a sea of green.

Tips of the trade

For investors considering, uh, taking the plunge into water stocks, the PowerShares Water Fund (ticker symbol: PHO; powershares.com) gets high marks from the experts. “It’s the easiest and best choice for consumers looking to get some exposure to this sector,” says Doug Wheat. The fee is low: 0.6 percent for PHO, as opposed to the 1.5 percent that most mutual funds charge. And, just like the Palisades index that it mirrors, it’s up about 18 percent since it launched last year. Currently, the fund is made up of 37 holdings in six areas: utilities (27 percent), treatment (23 percent), resource management (17 percent), infrastructure (16 percent), multiplebusiness companies (11 percent) and waterquality testing (6 percent), and it is adjusted slightly each quarter to reflect the market. (It’s worth noting that General Electric makes up about 1 percent of the fund, which might be of concern to investors who want to steer clear of defense and nuclear power. And, though most of the utilities in the fund have contracts with U.S. municipalities, a few are involved in international privatization — a trend that has been criticized because it can encourage profiteering.)

Another option is the Luxembourg–based Sustainable Asset Management’s Water Fund, a traditionally-managed SRI mutual fund that’s also focused on the water sector. It’s up about 8 percent in the past 12 months and has a 1.5 percent fee (sam-group.com). And of course, there are the individual stocks in the Palisades index. At press time, Francesca McCann named her favorites: the sewer-rehab company Instituform Technologies (INSU); the resource management consultant Tetra Tech (TTEK); U.S. water utility holding company Aqua America (WTR); Watts Water Technology (WTS), which makes water quality and conservation products; and American States Water (AWR), another utility holding company.

Story by Sarah Schmidt. This article originally appeared in Plenty in August 2006. This story was added to MNN.com in June 2009.

Copyright Environ Press 2006.