There is a boom in water exchange-traded funds, or ETFs (which are like mutual funds that you can buy and sell just like stocks). A Barron’s piece over the weekend reported on the growing list of water-themed ETFs. But before buying water ETFs, investors should know a little about how they work.

The newest one is PowerShares Global Water Portfolio, which trades under the ticker PIO. It contains 41 companies in the business of doing something with water -- providing it, treating it, etc.

Before that, we had the Claymore S&P Global Fund (CGW), which hit the market in May. It has a 50-stock list. First Trust ISE Water Index Fund (FIW) also went public in May. The granddaddy of these water ETFs is the PowerShares Water Resources Portfolio (PHO), which came out in late 2005.

I’ve never been a big fan of ETFs, because I prefer to pick stocks individually. I also don’t like the rebalancing aspect of ETFs. They tend to sell their winners each quarter, or each year, so no one stock dominates the index. Yet in my own investing experience and research, I find that it is precisely those big winners that really make the difference between doing OK and doing great in the stock market.

Even so, if you can’t buy a spread of water stocks, these could be your proxy for the water idea. You won’t make a ton of money, but you could still do better than the market as a whole.

Regardless of whether or not I invest in them, it can be useful to pay attention to the ETFs, because as their assets grow, they become steady buyers of the stocks in their indexes. Some of the water companies have relatively small market caps. And some of these ETFS are getting large. The PHO has nearly $2 billion in assets. One of its top holding is Layne Christensen, which has a market cap of only $700 million and change.

The end result of a booming water ETF sector could be relatively high multiples on a number of water stocks. It will be interesting to follow these developments. But again, a little digging here gives us a couple of useful insights. The first is that ETFs exhibit bad investing habits (selling off those winners). And the second is that the most important impact of ETFs may be the effect their increasing popularity has on the stock prices of the stocks they must buy.