Q:  What is the history of the water-oriented portfolios in the PowerShares ETF family? A : PowerShares Water Resources Portfolio (PHO), listed on December 6, 2005 by Invesco PowerShares a leading provider of exchange-traded funds, was the first ETF to offer a pure play on water and water-related activities. The product provides investors with sophisticated access to a portfolio of companies engaged in the water industry, listed on a U.S. exchange and positioned to benefit from the rapidly accelerating water resource challenges. The other water product in PowerShares’ ETF family is the PowerShares Global Water Portfolio (PIO) which invests in water companies worldwide. With a global perspective the underlying investment rationales are no different, but the weightings of the sectors/components certainly are. This is due to the variable impact of the market drivers on a particular stage of water resource management and this differs significantly worldwide. For this reason, the Indexes are designed to be complimentary, utilizing both to optimize exposure to ‘water’. The two ETFs seek investment results that correspond generally to the price and yield of the Palisades U.S. Water Index and the Palisades Global Water Index. Q:  What kinds of companies are included in the ETFs? A : The water industry at this point is an amalgamation of businesses that is coalescing into a well-defined industry. Because of this it is important to not only include those companies, domestic and foreign, that are engaged in the many diverse segments of the water industry but also to design an index that optimizes the exposure to the positive changes between those segments. Q:  What are the main drivers in the water market? A : From a pure supply and demand perspective the drivers are supply limitations in combination with burgeoning demands. Water supplies face temporal and spatial dislocations as well as limitations caused by contamination. Water demand, while clearly a direct function of population growth has many facets such as population ecology, economic growth, agriculture, and so on. Ultimately this is what drives the global water market. The institutional frameworks that govern these drivers are the mechanisms through which the supply/demand imbalances are addressed from a policy perspective. Q:  What is the actual sector breakdown in these indexes? A : Each of the water indexes is broken down into functional water industry sectors that enable the indexes to achieve optimal exposure through a fundamental weighting approach by sector. The Water Utility sector includes the regulated suppliers of water, directly responsible for distribution to residential, commercial, industrial, etc. customers. The Water Treatment sector is comprised of companies that play a role in treating water for an intended end use, whether drinking, recycled water, industrial processes, irrigation, ecological protection, etc. The Analytical sector refers the function of analyzing, measuring, or monitoring water. The Infrastructure sector delineates those companies engaged in the repair, replacement, or construction of water distribution systems, wastewater systems, and storm water collection systems. And the Resource Management sector focuses on resource sustainability concepts. Other sectors include emerging water companies and multi-business activities. Q:  How often are the indexes reconstituted? A : The indexes are rebalanced and reconstituted quarterly. This frequency allows a unique advantage in the context of a rapidly changing water industry structure. Q:  What are the economics that cover the water industry? A : That, in my opinion, is one of the most pivotal questions. Water has historically been viewed as a public good to be supplied under public sector economics, namely the principles of market failure, externalities, and institutional economics. This evolved in a period of relative water abundance. Clearly the scale has now been tipped toward unsustainable usage. This suggests the application of a different allocation method; a method in which the marketplace can play a key, albeit not controlling, role. Regulation will always be a factor but the trend is toward water as an economic good and the institutional governance must therefore accommodate that. Price will then become a better mechanism to allocate an increasingly ‘scarce’ resource while maintaining the distribution mandates of social costs and benefits. Q:  Given the background, what might serve as an investment rationale? A : The broad view is an industry facing a severe imbalance in ‘demand’ over ‘supply’ for a resource that is mission critical across a wide spectrum of the value chain. Specifically, the investment rationale varies by sector. For example Analytics represents the smart water grid, Infrastructure the spending gap, Treatment the application of enabling technologies and so on. Overlying the entire industry is the institutional transition of the governance of water from a public good to an economic good; this presents a very powerful investment rationale. Q:  Could you quantify the scope of business in this industry? A : The water industry is often cited as being the third or fourth largest industry in the world. The total market would be around $460 billion annually. While enormous in size, it is extremely diverse and ultra-fragmented and this is where the industry rationalization comes in. This structure arises from an extremely large scope of water activities; one that must be narrowed to provide an integrated solution to bigger problems. Q:  Does the global index cover U.S. companies too? A : Yes, but just to the extent that a U.S. company might have a global presence that provides a better proxy for that particular space than a foreign firm. The global water index is targeted to companies worldwide according to, again, the relative fundamentals of the global water sectors. Q:  Are all components equally weighted in the index? A : No, within each fundamentally weighted sector the components are weighted equally at every rebalance point but each sector has a different weight vis-a-vis the others so that the index can concentrate on the areas of greatest growth. Q:  Which region currently offers the best investment opportunity in the global index? A : The clear opportunities are in the developing economies. This includes the BRIC countries as well as the frontier economies of the LAACE regions (Latin America, Africa and Central Europe). While the North American market is likely still the single largest market, and that distinction is rapidly eroding, it is not the fastest growing region. We expect emerging economies to present a growing investment opportunity since here you are talking about new infrastructure or really adding significant capacity in order to bring safe drinking water access and sanitation up to global standards. Q:  From a regulatory perspective, what needs to be changed in North America and other advanced countries? A : The regulatory approach must continue to focus on the expanding science behind protecting human health as well as the environment but also address the institutional impediments to funding and implementing cost-effective solutions. In North America in particular, I believe the regulatory governance of water has been extremely effective. And to their credit, the water industry in the U.S. has very efficiently dealt with, and largely achieved, the goals of the major American legislation with respect to water. It clearly demonstrates that the sustainable management of water can be taken to the next level. But this will cost a great deal of money and therefore the regulatory side of the equation must be revisited from a policy perspective; that is, one that embodies the commonly used term ‘sustainability’ but that also begins a path toward a unified global ecology.