Investing in Water to Hedge Risks of Climate Change

We are all taking greater steps to help the environment to slow the progression of climate change and improve the safety of our water supply. Unfortunately, despite our best efforts to transition to renewable energy and make other changes in our lives, climate change is a worsening problem. This is creating concerns about the future of water supply.

The future of water is not looking good. Climate change is increasing the regularity of droughts while the global water infrastructure continues to age. For a lot of the world’s population, clean drinking water in the future is far from guaranteed. 

However, the aging water infrastructure and future water shortages present a massive global opportunity for water infrastructure and technology companies.

Why should you invest in water?

With climate change, there is less snowpack in the mountains, and water in the soil is evaporating faster, creating severe drought conditions. Right now, there are severe droughts in California and the West of the United States. More than half of the Western U.S. is facing possibly the worst drought in centuries.  We have to move towards reducing water waste, but it is also important to tap other sources of water.

Globally, the per capita water supply has been decreasing since the 1950s, and over 800 million people lack access to clean water. The problem will get worse as the global population continues to expand. The United Nations predicts that half the global population could lack safe drinking water by 2025.

The businesses that can solve the water crisis could benefit from growing water shortages. The beneficiaries include water treatment companies (that make water reusable) and water technology and infrastructure companies.

Water treatment companies

Around 80% of wastewater globally and as much as 90% in emerging markets goes untreated. Given growing water shortages, it’s important to make it reusable. Publicly traded water companies that sell water treatment technologies include Danaher (NYSE:DHR) and Ecolab (NYSE:ECL).

Water technology and infrastructure companies

Water infrastructure is aging: around 15% of water in the U.S. is lost to leaks, and that number can be as high as 50% in Delhi, India. Growing spend by municipalities and utilities on products such as water pumps, smart meters, filtration, disinfection, and drainage equipment is a must. This could benefit water technology and infrastructure companies such as Xylem (NYSE:XYL) and Grupo Rotoplas (BMV: AGUA).

Water utilities

Finally, water utilities such as American Water Works (NYSE: AWK) continue to be critical as they distribute water to residential and commercial customers. Water utilities also provide a critical social service, making them an attractive option for socially responsible investors. In addition, utility revenues are tied to long-term public contracts, leading to consistent and reliable profits. These profits are distributed to shareholders via quarterly dividends.

Water ETFs

One of the easiest ways to invest in the future of water is through water ETFs. Solving the water crisis is a key investment theme, and several water funds such as Invesco Water Resources ETF (NASDAQ: PHO) have beaten the S&P 500 year-to-date.

At SustainFi, we have looked at the available options and found five funds that let investors bet on the future of water. These funds invest in wastewater treatment and technology companies as well as utilities. Four out of five funds invest globally, while one solely invests in U.S. companies. 

Invesco Water Resources ETF (NASDAQ: PHO)

Launched in 2005, the Invesco Water Resources ETF (PHO) is the oldest and largest water ETF. The fund tracks the Nasdaq U.S. Water Index and invests in U.S. companies that create products designed to conserve and purify water for homes, businesses, and industries. The ETF’s top three holdings are Waters Corp (NYSE: WAT), Danaher Corp (NYSE: DHR), and American Water Works (NYSE: AWK.) PHO is up nearly 25% year-to-date.

PHO s the only water ETF to solely invest in U.S. companies. As a result, the fund is very concentrated: its top ten holdings make up almost two-thirds of the fund’s assets. 

First Trust Water ETF (NYSEARCA: FIW)

Established in 2007, the First Trust Water ETF selects companies of any market capitalization that derive revenue from the potable and wastewater industries. FIW spreads its investments across 37 holdings. The fund’s top three holdings are Danaher Corp (NYSE: DHR), Pentair PLC (NYSE: PNR), and Xylem Inc (NYSE: XYL). FIW is up nearly 24% year-to-date.

Invesco S&P Global Water Index ETF (NYSEARCA: CGW)

The Invesco S&P Global Water Index ETF tracks a global index of water utilities, equipment, and materials, weighted by market cap. Launched in 2007, CGW holds over 50% of its assets in U.S. companies. Its top three holdings are American Water Works (NYSE: AWK), Xylem Inc (NYSE: XYL), and Geberit AG (SWX: GEBN). CGW is up nearly 25% year-to-date.

Invesco Global Water ETF (NASDAQ: PIO)

Not to be confused with the Invesco S&P Global Water Fund (PHO), the Invesco Global Water ETF tracks an index of global water conservation and purification companies. It was launched in 2007, two years after its domestic counterpart. The fund has around 40 holdings, primarily consisting of industrials and utilities. The top three are Danaher Corp (NYSE: DHR), Ecolab (NYSE: ECL), and Ferguson Plc (LON: FERG). PIO is up over 20% year-to-date. Global diversification does come at a cost, however, as the Invesco Global Water ETF is the most expensive water fund on the list at a 0.75% expense ratio.

Ecofin Global Water ESG Fund (NYSEARCA: EBLU)

By far the newest fund on the list, the Ecofin Global Water ESG Fund was established in 2017. This ETF offers extensive exposure to companies that provide water infrastructure and equipment. The fund’s 43 holdings include some familiar names: American Water Works (NYSE: AWK), Geberit AG (SWX: GEBN), and Ecolab (NYSE: ECL) (which make up the top three). It is the least expensive ETF on the list, with a 0.40% expense ratio. EBLU is up over 21% year-to-date.

Water ETFs provide investors with the opportunity to meet a real and growing need. As governments worldwide move to address water shortfalls, leading companies in water technology and infrastructure will be in high demand, resulting in outsized gains for their shareholders.

Water ETFs offer investors diversified, tax-efficient, and accessible means to grow their portfolios while contributing to a more sustainable future.