Hougan Feb 0509

Food & Water

The ETF Perspective

Matt Hougan Editor Index Universe.com and ETFR

What’s an ETF?

An ETF is a mutual fund which trades on an exchange, just like a stock.

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ETF Anatomy: Mutual Funds

Regulated by the SEC under the 1940 Act. Holds a pool of assets: stocks, bonds, futures, even gold.

Built on sound corporate governance principles Board of Directors Compensated management Highly detailed recordkeeping and audit requirements

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ETF Anatomy: Mutual Funds and Net Asset Value

Mutual funds work by taking the whole pie, and slicing it into equal shares.

Each share has the same Net Asset Value (NAV).

Traditional mutual funds allow investors to create or redeem shares after the market closes each day.

Every dollar in gets invested, every dollar out is funded by asset sales.

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ETF Anatomy: The Twist

ETFs track and hold a known and fully disclosed basket of stocks, usually an index.

ETF shares trade directly on a stock exchange.

Just like stocks, investors experience commissions and bid/ask spreads.

Just like mutual funds, fund sponsors get paid a management fee.

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ETF Anatomy: Creation/Redemption

New ETF shares are only created by large, institutional investors called Authorized Participants, or APs. New ETF shares are typically made in‐kind, with the AP delivering baskets of stocks.

ETF shares are only redeemed for the whole basket of stocks.

No Cash. No Transaction Costs.

Lower Taxes.

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ETF Anatomy: Creation/Redemption $

$

Investor

Broker

ETF Shares

ETF Shares

Authorized Participant

Security Basket

Fund Sponsor

ETF Share Block (10k, 50k, 100k) 8

ETF Benefits Can be very low cost.

Complete transparency Generally tax efficient Easily accessible Highly granular

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WATER ETFS: AS WATER GAINS VALUE 10

A Small Pool: Water ETFs

12/31/08 11

Water ETFs: Big Variations

12/31/08 12

Water ETFs: Big Variations

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Water ETFs: The Dollar

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Water ETFs: The Dollar

12/31/08 15

Water ETFs: The Dollar

The international/domestic decision is driving short term returns … perhaps even more than water/not‐water.

The long term thesis of water investing suggests this could be a shorter term issue.

The short term likelihood of a strong dollar?

Who knows…

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Water ETFs: Big Variations

12/31/08 17

Water ETFs: PowerShares

Palisades Indexes Universe divided into sub‐sectors with chosen allocations (e.g. 25% Resources, 30% Utilities) Equal weights inside each sector – but, this can lead to some odd “equal” weights: 6.7% in Tetra Tech 1.3% in Aqua America

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Water ETFs: Claymore

S&P Global Water Index Universe and weightings divided into two buckets with 25 stocks each Equipment & Materials Utilities & Resources

Traditional cap‐weighting then leads to big concentrations

25% in top 3 names 19

Water ETFs: Choosing The Right Fund?

First choose U.S. vs. international.

Then choose concentrated vs. diverse.

But don’t just choose “a” water fund.

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FOOD ETFS: PIGS AND CORN? OR PICKS AND SHOVELS? 21

Food: The Big Question

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Picks And Shovels: Leveraging Innovation

12/31/08

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Other Equity Advantages Better Tax Treatment (In Some Cases) Simplicity (Easier to understand, easier to explain) 24

Tapping Ags: 2 Approaches

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Food: The Big Question

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Equity Downside Corporate Risk Higher Long‐Term Correlations To Equities

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Considering Futures Low Correlation to Equities

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Considering Futures Low Correlation to Equities Direct Food Price Exposure Income: Collateral Yield

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Futures Downside Contango Tax Treatment Zero Innovation (It’s just stuff) 30

Contango??

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Roll Yield??

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Taming Contango Optimized Roll Yield “Continuous Commodity” Straight Index

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Taming Contango

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Ag‐Future ETFs and ETNs

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A Note on Notes A Promise to Pay Pros: No Tracking Error Better tax treatment Con: It’s debt 36

Futures: Tough For Ags

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Futures: Pockets of Strength

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