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One Investor’s Trash Is Another’s ETF: Investing In Waste Management Funds
Tuesday, September 06 2011 | 04:04 PM
|Given that the recent ISM Manufacturing Report was just barely above contraction levels, many investors might have second thoughts about buying up securities in the industrial sector. This is especially true considering the lackluster employment prospects for much of the country as well as a general lack of spending by businesses, who are often the primary consumers of these industrial goods anyway. Yet, as with any sector, there is a corner of the industrial segment which may be poised to grow no matter what happens in the economy both here and abroad; the environmental services/waste management division.
Companies in this corner of the market are somewhat immune to downturns as trash is always created and demand for waste removal is always prevalent. Furthermore, consumers in emerging markets, who are just beginning to make discretionary purchases for the first time, are starting to require more services in this segment and could represent a nice patch of growth for the industry no matter what happens in developed markets.
In fact, while some ETFs in the Industrial Equities ETFdb Category have lost more than 10% on the year, the comparable environmental service fund has only lost 4.3%. When taking a longer term look, the results are even more skewed towards the sector as it outperformed every fund but one in the Industrials category over the trailing one year period [ETF Plays To Invest Like Buffett, Fisher, Paulson].
In light of this recent outperformance, low levels of exposure to cyclical trends, and positive forces in emerging markets, we have decided to take a closer look at two ways for investors to play the environmental services sector in ETF form. Both funds represent quality choices, but each have pros and cons that investors must be aware of before choosing a particular product for their portfolios.
Global X Waste Management ETF (WSTE)
WSTE is the newcomer to the space, having debuted in April of 2011. The fund tracks the Solactive Global Waste Management Index which seeks to reflect the performance of the broad waste management industry, tracking roughly 30 companies in total. In terms of sector exposure, it is relatively heavily broken down between three key groups; hazardous waste removal, non-hazardous waste management, and recycling, giving the fund a nice balance. Investors should also note that WSTE is relatively evenly split between American and international equities with top holdings going towards companies in Australia, France, and Hong Kong in the global market. WSTE charges investors 65 basis points a year in services and is a decent value play; the fund has a P/E below 16 and a beta below 1.0 [see charts of WSTE here].
Market Vectors Environmental Services ETF (EVX)
EVX is far older than its competitor from Global X, having debuted in October of 2006. The fund from Van Eck holds just over 20 securities in total with the largest levels of exposure going towards names such as Veolia Enviornment, Stericycle, and Waste Management, all of which are given about a 10% weighting in the fund. In addition to these names, the fund by tracking the NYSE Arca Environmental Services Index, follows companies that may benefit from the global increase in demand for consumer waste disposal, removal and storage of industrial by-products, and the management of associated resources. In terms of country exposure, just 15% goes to international markets with the vast majority of that exposure going to Europe and Canada. With that being said, investors should also note that EVX affords a significant portion of its securities to small and micro cap firms, giving the product a growth tilt. In fact, EVX has both a P/E ratio and beta higher than its Global X cousin, although it does pay out a decent yield that is just above 1.0% [see how EVX and WSTE compare with the Head-To-Head ETF Comparison Tool].
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