Water exchange traded funds: A study on idiosyncratic risk using Markov switching analysis

Abstract

Abstract:We investigate the relationship between idiosyncratic risk and return among four water exchange traded funds-PowerShares Water Resources Portfolio, Power Shares Global Water, First Trust ISE Water Index Fund, and Guggenheim S&P Global Water Index ETF using the Markov switching model for the period 2007-2015. The generated transition probabilities in this paper show that there is a high and low probability of switching between Regimes 1 and 3, respectively. Moreover, we find that the idiosyncratic risk for most of the exchange traded funds move from low volatility (Regime 2) to very low volatility (Regime 1 and 3). Our study also identify that the beta coefficients are positive and entire values are less than 1. Thus, it seems that water investment has a lower systematic risk and a positive effect on the water exchange traded index funds returns during different regimes.

Returns and volatility of water investments

“…The ZWI is an equally weighted index comprised of companies engaging in the fundamental activities of the global water industry, such as distribution, filtration, pumps and pipes, and treatment (Geman & Kanyinda, 2007;Roca & Tularam, 2012). Following the publication of the ZWI, two exchange traded funds (ETFs), Power Shares Water Resources (PHO) and Power Shares Global Water (PIO) were successively introduced to investors to assist them to keep track of companies included in the ZWI (Keenan, 2008;Roca et al, 2015;Tularam & Reza, 2016). As such, there are other ETFs available to investors, for example, Guggenheim S&P Global Water Fund which is based on the S&P Global Water Index, and First Trust ISE Water (FIW) which is based on the ISE Water Index (Atkinson, 2009).…”

“…However, often a number of companies included in these water indices generate only a small portion of their revenue from water-related products or services. Questions were raised as to whether these water ETFs can be defined as pure water funds (Kearney, 2008;Tularam & Reza, 2016). Water funds also have been created for investors so that they can have opportunities to invest their money in the water market.…”

“…Water is the most essential life-sustaining substance and the only commodity that is needed for life, agriculture, and industry over the world (Reza, Tularam, & Li, 2017;Summit Global Management, 2017;Tularam & Reza, 2016). However, climate change recently has further compounded the problems of water scarcity (Tularam & Hassan, 2016;Tularam & Murali, 2015;Tularam & Properjohn, 2011).…”

“…Together, the climate change effect and population growth has led to a water deficit, which in turn has posed major challenges to many parts of developed and developing countries including Bangladesh, Pakistan, Southern India, Northern China, Central Asia, the Middle East, the Sub-Sahara Africa, Southern Spain, Midwest United States, Mexico and the Andes, which are facing chronic drinking water scarcities (Jin, Li, Roca, & Wong, 2016;Reza et al, 2017;Roca & Tularam, 2012;Roca, Tularam, & Reza, 2015;Tularam & Marchisella, 2014;Wild, Francke, Menzli, & Schon, 2010. Water shortages occur due to rapid economic development and lack of water infrastructure finance Tularam, 2014;Tularam & Illahee, 2010;Tularam & Keeler, 2006;Tularam & Krishna, 2009;Tularam & Reza, 2016;Tularam & Singh, 2009). There are shortages of the water necessary to sustain daily life, leading to serious food shortages caused by effects on the ecosystems (Beppu, 2007;Jones, 2009;Tularam & Hassan, 2016).…”

The Effects of Climate Change on Rural-Urban Migration in Sub-Saharan Africa (SSA)—The Cases of Democratic Republic of Congo, Kenya and Niger

“…Compounding rainfall fluctuation will be the anticipated effects of climate change that will cause more challenges that are yet to be seen. For instance, this may include sudden and large increase in rainfall fluctuations and distribution in the SSA region, creating natural disasters such as floods and droughts have been noted [2,6,35,36]. For instance, annual rainfalls in Sierra Leone, Liberia, Seychelles and Mauritius may reach 2000 mm/yr [34].…”