Water is all around us, yet it has tended to flow underground as an investment. That is, until recently, as global attention turns toward changing weather patterns.
Exchange-traded funds (ETFs) with water-related holdings have risen in value by as much as 20 per cent since the beginning of 2019. It’s hard to know exactly why, but Deborah Fuhr, managing partner and founder at research firm ETFGI LLP, suggests it could be linked to growing interest in the impact of climate change. As rising global temperatures melt the polar ice caps, oceans are rising and overtaking natural inland freshwater reserves.
The threat to the world’s supply of fresh water has sparked interest in technology that could preserve fresh water or process salt water through desalination, Ms. Fuhr says.
“There is interest in water. Think Israel and the Middle East, where desalination plants are very important,” she says. As temperatures rise, the amount of water in lakes is going down, she says, pointing to the recent drought in California as another example.
Pinpointing the reasons behind the strong performance of water ETFs is made difficult by the varied nature of the funds themselves, Ms. Fuhr says. Water is not an asset class on its own, but rather several asset classes that include consumer staples, consumer discretionary, infrastructure, information technology, utilities, health care and industrials.
“There are not too many companies that are pure water. Sometimes, they are utilities; sometimes, they’re health care; and sometimes, they’re industrials,” she says. “You have to look at which types of companies you want exposure to.”
For example, two companies held in all five water ETFs traded in North America are Xylem Inc. and Danaher Corp. Xylem is classified and an industrial stock because it manufactures water-treatment equipment. Danaher is considered a health-care company because it manufactures technology to treat water for medical applications.
Here are the major water ETFs:
Invesco Water Resources ETF (PHO-Q): With almost US$1-billion in a wide mix of water-related stocks in the Nasdaq OMX US Water Index, this is the largest water ETF. Its value has risen by 20 per cent so far this year. Over the past five years, it has posted a total return of 30 per cent.
Invesco S&P Global Water Index ETF (CGW-A): This fund has US$621-million in assets and a more global focus. As the name implies, it tracks 50 of the largest water-related businesses in the S&P Global Water Index. Its value has risen by 12.5 per cent so far this year and by 22 per cent over the past five years.
First Trust Water ETF (FIW-A): This ETF has US$353-million in assets and tracks the ISE Clean Edge Water Index, which skews toward smaller companies in the potable water and wastewater industries. Its value is up by 16.3 per cent so far this year and by 55 per cent over the past five years.
Invesco Global Water ETF (PIO-Q): This fund has US$187-million in assets and tracks the Nasdaq OMX Global Water Index, which may include emerging-market companies. Since the start of the year, it is up by 15 per cent and by 12 per cent over the past five years.
iShares Global Water Index ETF (CWW-T): This is the only Canadian-listed, Canadian-dollar water ETF. It tracks the S&P Global Water Index. Its value has risen by 11 per cent so far this year and by 50 per cent over the past five years.
The annual fees for all five water ETFs are higher than those of most basic ETFs, ranging from 0.55 per cent to 0.75 per cent of total assets invested.
These funds “have a reasonably good probability of continuing to maintain or outperform other sectors of the market,” says Dan Deming, managing director at Chicago-based KKM Financial LLC.
Mr. Deming specializes in ETF portfolios, but his interest in water infrastructure is rooted in his personal experience witnessing the tragic results of the contamination of drinking water in Flint, Mich., in 2014.
“Growing up in Michigan, what happened in Flint is something that is on the forefront of my mind as we continue to see some of the aging infrastructure,” he says.
ETFs are the best way for retail investors to get exposure to the broader water sector, he says, because individual water stocks can be risky. “I like the diversity the ETFs offer,” he says. “You reduce your exposure from a single name.”
In a strange reversal, Mr. Deming says individual water companies could pose a risk to investments in water funds by lowering the market value of water.
“If some technology is able to efficiently desalinate salt water, it could increase the supply of water, in general. That could be a risk if the world was suddenly awash in water,” he says.
His recommendation for investors is to restrict holdings in a water ETF to below 10 per cent of an overall portfolio.