We know water is the source of life. But it can also be a source for portfolio diversification. Sounds strange, we know but remember: Like gold and oil, water is a commodity – and it happens to be rather scarce nowadays. So, as with any other scarcity, the water shortage creates investment opportunities.

Tutorial: Commodity Investing 101

Global Water Resources

About 70% of the earth's surface is covered in water, but 97% of it is saltwater, which is unfit for human use. Saltwater cannot be used for drinking, crop irrigation or most industrial uses. Of the remaining 3% of the world's water resources, only about 1% is readily available for human consumption.

Global water supply

Global Shortage

Rapid industrialization and increasing agricultural use have contributed to worldwide water shortages. Areas that have experienced lack of H2O include China, Egypt, India, Israel, Pakistan, Mexico, parts of Africa and the United States (Colorado, California, Las Vegas and the East Coast), to name but a few.

Pollution also highlights the need for clean water. In the U.S., the dead zone off the Gulf Coast highlights the impact of fertilizer runoff, and methyl tertiary butyl ether (MTBE), an additive in unleaded gasoline, can be found in well water from California to Maryland. Overseas, highly publicized incidents in Russia, China, and elsewhere demonstrate that pollution isn't limited to the West. Of course, fouled water supplies further limit the amount of fresh water available for human use.

Indexes

Here are some of the more popular indexes designed to track various water-related investment opportunities:

  • The Dow Jones U.S. Water Index is composed of approximately 29 stocks; it is a barometer consisting of a large number of international and domestic companies that are affiliated with the water business and have a minimum market capitalization of $150 million.
  • The ISE-B&S Water Index was launched in January 2006, this index represents water distribution, water filtration, flow technology and other companies that specialize in water-related solutions. It contains over 35 stocks.
  • The S&P 1500 Water Utilities Index is a sub-sector of the Standard & Poor's 1500 Utilities Index; this index is composed of just two companies, American States Water (NYSE:AWR) and Aqua America (NYSE: WTR).
  • The S&P Global Water Index is an 11-year-old index that contains 50 companies around the world; their water-related businesses fall into two areas: utilities and infrastructure, and equipment and materials.

The Bloomberg World Water Index and the MSCI World Water Index provide a look at the water industry from an international perspective, although it can be rather difficult to find current information about either index. There are also a variety of utility indexes that include some water stocks. (For further reading, see "Indexes: The Good, the Bad and the Ugly.")

How To Invest in Water Commodities

A look at the holdings of any of the water indexes provides an easy way to begin your search for suitable investment opportunities. Companies from blue-chip stalwart General Electric to small-cap Layne Christensen are all seeking a piece of the water market. In addition to direct stock purchases, some of the larger firms offer dividend reinvestment plans. Firms seeking to profit from water-related businesses include beverage providers, utilities, water treatment/purification firms and equipment makers, such as those that provide pumps, valves and desalination units.

When it comes to bottled water, the market is growing internationally. Demand is on the rise from China to Mexico, following in the footsteps of the spike in U.S. consumer demand. Estimates suggest that within the last ten years American per-capita consumption of bottled water has doubled – the average American drinks approximately 200 bottles of water a year. On the desalination front, some 100 countries currently rely on desalination for at least part of their freshwater consumption needs.

If stock picking doesn't interest you, ETFs, mutual funds and unit investment trusts (UITs) also provide plenty of opportunities to invest in water. The PowerShares Water Resource Portfolio ETF (PHO) is the largest, with a U.S.-centric basket of 36 holdings that tilts toward mid- and smaller-cap companies. The iShares Dow Jones U.S. Utilities Index ETF (IDU) provides some exposure to water-related stocks. Other new alternatives include the PowerShares Global Water Portfolio ETF (PIO), which tracks the Nasdaq OMX Global Water Index, and the First Trust ISE Water Index Fund (FIW). Based on popularity, new alternatives are slowly emerging. (To learn more, see "Top 3 ETFs for Investing in Water in 2017.")

Additionally, two unit investment trusts that specialize in water-related investments are the Claymore-Boenning & Scattergood Global Water Equities UIT and the Claymore-Boenning & Scattergood U.S. Water Equities portfolio.

The Bottom Line

Recent years have seen an upswing in the demand for investments that seek to profit from the need for fresh, clean water. If the trend continues – and by all indications, it will – investors can expect to see a host of new investments that provide exposure to this precious commodity and to the firms that deliver it to the marketplace. There are currently numerous ways to add water exposure to your portfolio; most simply require a bit of research. Opportunities to invest in this scarce resource are flowing freely, so dive in!

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.