We know water is the source of life. But it can also be a source for portfolio diversification. 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.
- Water is arguably the most important resource on planet earth.
- Shortages of water can lead to social, political, and economic disruption.
- Water is increasingly scarce, due to climate change, pollution, and increasing demand.
- Because of its importance, investors can diversify their portfolios by acquiring water-related assets and investments.
- There are multiple indexes, mutual funds, and ETFs that allow retail investors to gain exposure to water-related securities.
Understanding Water Investments
The investment case for water is simple: water is one of the most important resources, and it is likely to become a lot scarcer. About 70% of the earth's surface is covered in water, but over 97% is saltwater. 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.
Rapid industrialization and increasing agricultural use have contributed to worldwide water shortages. Areas that have experienced a lack of H2O include China, Egypt, India, Israel, Pakistan, Mexico, most of Africa, and the United States (Arizona, New Mexico, California, and West Texas), to name but a few.
Pollution also highlights the need for clean water. 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 restrict the amount of fresh water available for human use.
$55 Billion Investment in Clean Water
On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act. The bipartisan infrastructure bill authorizes $1.2 trillion in spending, which includes $55 billion allocated to create clean drinking water, $65 billion in clean energy, and $21 billion to clean up hazardous, polluted sites.
The legislation is good news to clean water advocates since it will expand access to clean drinking water for households, businesses, schools, and child care centers in cities and rural areas. The legislation will also invest in water infrastructure to eliminate lead service pipes.
Water Investment 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 many international and domestic companies that are affiliated with the water business and have a minimum market capitalization of $150 million.
- The ISE Clean Edge Water Index was launched in December 2000, and this index represents water distribution, water filtration, flow technology, and other companies specializing in water-related solutions. It contains 35 stocks.
- The S&P 1500 Water Utilities Index is a sub-sector of the Standard & Poor's 1500 Utilities Index; this index comprises just two companies, American States Water (NYSE: AWR) and Aqua America (NYSE: WTR).
- The S&P Global Water Index is an index that began in 2001 that contains 50 companies worldwide; their water-related businesses fall into two areas: water utilities and infrastructure and water equipment and materials.
The MSCI Global Sustainable Water Index provides another look at the water industry from an international perspective. The index focuses on developed and emerging companies that earn at least 50% of their revenue from sustainable water products and services. There are also a variety of utility indexes that include some water stocks.
2.3 billion people live in "water-stressed" countries, according to the United Nations, meaning that they use up more than 25% of their fresh water resources every year. 700 million people could be displaced due to water scarcity by 2030.
How to Invest in Water Securities
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.
A look at the holdings of any of these water indexes provides an easy way to start looking 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.
When it comes to bottled water, the market is growing internationally. Demand is rising from China to Mexico, following the spike in U.S. consumer demand. Estimates suggest that from 2010 to 2020, American per-capita consumption of bottled water increased 61%–in fact, the average American drinks approximately 45 gallons of bottled water a year. According to a 2018 UN study, 177 countries 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 Invesco Water Resource Portfolio ETF (PHO) is the largest, with a U.S.-centric basket of 38 holdings (as of Feb. 2022) that tilts toward mid- and smaller-cap companies.
The iShares U.S. Utilities ETF (IDU) provides some exposure to water-related stocks. Other alternatives include the Invesco 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.
How Do You Invest in Water as a Commodity?
The Chicago Mercantile Exchange has tradeable water futures that are tied to water prices in California. These futures contracts allow investors to bet on the future value of the Nasdaq Veles California Water Index, effectively betting on the future price of water.
How Is Michael Burry Investing in Water?
At the conclusion of The Big Short, it is revealed that Scion Capital founder Michael Burry followed up his successful short trade with investments in water. In later interviews, Burry explained that "food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas." Farmland in high-precipitation areas is effectively a bet on water's future value. However, for retail investors, it may be easier to focus on water stocks.
How Do You Invest in Water Stocks?
Water stocks are stocks of companies whose business is closely tied to irrigation, utilities, water treatment, or other water-related industries. One can invest in these by buying the stocks of individual companies, or by investing in a mutual fund or ETF with high exposure to water stocks.
The Bottom Line
Recent years have seen an upswing in demand for investments that profit from the need for fresh, clean water. If the trend continues, 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.