{"id":70358,"date":"2023-10-08T22:21:27","date_gmt":"2023-10-09T02:21:27","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/fiw-look-at-factors-coldly-consider-valuation-risks-nysearcafiw\/"},"modified":"2023-10-08T22:21:31","modified_gmt":"2023-10-09T02:21:31","slug":"fiw-look-at-factors-coldly-consider-valuation-risks-nysearcafiw","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=70358","title":{"rendered":"FIW: Look At Factors Coldly, Consider Valuation Risks (NYSEARCA:FIW)"},"content":{"rendered":"
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In the past, I wrote a few articles concerning the water theme and investment vehicles that provide exposure to it. More specifically, I covered the Invesco Global Water ETF (PIO) as well as<\/span> the Invesco Water Resources ETF (<\/span>PHO) in October 2022, and the Invesco S&P Global Water Index ETF (<\/span>CGW) in <\/span>July 2022. None of them received a Buy rating from me, with valuation and quality concerns being the primary drivers of skepticism.<\/span><\/p>\n

However, I have not yet provided an in-depth analysis of one of the largest names in this arena, the First Trust Water ETF (NYSEARCA:FIW<\/span>), a fund with about $1.3 billion in assets under management, yet. And I suppose it is worth conducting one today.<\/p>\n

In fairness, this is an ETF that clearly impressed me as its strategy was a source of consistent alpha in the past, with the fund heftily beating the iShares Core S&P 500 ETF (<\/span>IVV) over the long run, even despite rather burdensome <\/span>expenses. Moreover, neither the Industrial Select Sector SPDR\u00ae Fund ETF (<\/span>XLI) nor the Utilities Select Sector SPDR\u00ae Fund ETF (<\/span>XLU), two vehicles tracking cohorts of bellwether names from sectors FIW is most exposed to, saw gains substantial enough to compete with this water fund.<\/span><\/p>\n

However, although there is always a temptation to use past performance as the central argument for a bullish thesis, it has never been and will never be a guarantee for similarly upbeat returns in the future. So instead of expecting alpha to last ad infinitum, it is worth analyzing factors like quality, growth, and value coldly to understand whether the combination is apt for the current market environment or not. And with FIW valued richly, I have serious concerns regarding its short-term performance.<\/p>\n

FIW Strategy: Key Points<\/h2>\n

The basis for FIW’s strategy is the modified market cap-weighted ISE Clean Edge Water Index, which it has been tracking since its inception in May 2007; though the fund was renamed in December 2016, as detailed in the press release, it did not affect the strategy, and the underlying index remained the same. As described in the FIW factsheet, constituents of the index “derive a substantial portion of their revenues from the potable and wastewater industry.” Regarding eligibility, the fund’s website says there are “market capitalization, liquidity and weighting concentration requirements.” The target is 36 constituents. More details can be found in the prospectus.<\/p>\n

Factors Under The Hood: Expensiveness, A Few Quality Issues<\/h2>\n

As of October 5, FIW’s portfolio consisted of 37 stocks, with the key five having an almost 21% weight and the smallest position, Veralto Corporation (VLTO) having a 40 bps weight. VLTO has just recently been spun off from Danaher Corporation (DHR). This explains why the number of holdings is now above the target of 36.<\/p>\n

FIW has exposure to six GICS sectors, with industrials being the major one, accounting for more than half of net assets with 20 representatives, including the ETF’s largest position with a 4.4% weight, Ferguson plc (FERG). The smallest sector in this mix is consumer staples, with the only representative being Primo Water Corporation (PRMW). The table below compares FIW’s sector mix to PIO’s.<\/p>\n

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\"Sector<\/span>
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Created by the author using data from PIO, FIW<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The allocations are mostly similar, with a caveat being the absence of consumer staple names in the PIO portfolio, while the First Trust ETF has no exposure to the consumer discretionary sector.<\/p>\n

Now, the factor story should help us decide whether buying into FIW makes sense at this juncture. The table below contains the principal points worth discussing.<\/p>\n

<\/span><\/p>\n\n\n\n<\/colgroup>\n\n\n\n\n\n\n\n\n\n\n\n\n
Metric<\/td>\n5-Oct<\/td>\n<\/tr>\n
Market Cap<\/td>\n$20.89 billion<\/td>\n<\/tr>\n
EY<\/td>\n3.97%<\/td>\n<\/tr>\n
P\/S<\/td>\n3.59<\/td>\n<\/tr>\n
EPS Fwd<\/td>\n10.15%<\/td>\n<\/tr>\n
EBITDA\/EV<\/td>\n5.7%<\/td>\n<\/tr>\n
EBITDA Fwd<\/td>\n10.33%<\/td>\n<\/tr>\n
ROTC<\/td>\n10.8%<\/td>\n<\/tr>\n
ROA<\/td>\n8.32%<\/td>\n<\/tr>\n
Cash Flow\/EV<\/td>\n4.9%<\/td>\n<\/tr>\n
Quant Valuation B- or higher<\/td>\n10%<\/td>\n<\/tr>\n
Quant Profitability B- or higher<\/td>\n67.3%<\/td>\n<\/tr>\n<\/table>\n

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