Water is one of the planet's most coveted and widely used resources. Like other commodities, such as oil and gold, water assets can add significant diversification to any portfolio. One of the best ways to gain exposure to the water industry is through a water exchange-traded fund (ETF). Such ETFs invest in companies involved in the treatment and purification of water, as well as its distribution. Some notable names in the industry include German-based BASF SE, 3M Co. (MMM), and ITT Inc. (ITT). As an essential commodity, water ETFs are often used as a defensive position in a portfolio. To the extent that future water scarcity becomes a growing threat, these ETFs could be a significant offensive play as well.

Compared to other types of ETFs, the water ETF universe is small, comprised of about just four different funds, excluding inverse and leveraged ETFs, as well as ETFs with fewer than $50 million in assets. Also, these ETFs do not invest in water rights as a commodity. The best-performing water ETF for Q3 2020, based on performance over the past year, is the First Trust ISE Water Index Fund (FIW). We examine the top 3 water ETFs below. All numbers in this story are as of May 9, 2020.

First Trust ISE Water Index Fund (FIW)

  • Performance over 1-Year: 0.99%
  • Expense Ratio: 0.55%
  • Annual Dividend Yield: 0.61%
  • 3-Month Average Daily Volume: 65,003
  • Assets Under Management: $474.1 million
  • Inception Date: May 11, 2007
  • Issuing Company: First Trust

FIW is a multi-cap ETF that invests in U.S. equities of varying market caps and is primarily focused on companies in the potable and wastewater industry. The fund follows a blended strategy, investing in both growth and value stocks. As of 9 May 2020, the fund's top three holdings include: IDEXX Laboratories Inc. (IDXX), a provider of diagnostic and information systems for veterinary, food, and water testing applications; Danaher Corp. (DHR), a designer and provider of professional, medical, industrial, and commercial products to a variety of sectors, including the environmental sector; and Ecolab Inc. (ECL), a provider of water, hygiene, and energy technologies and services to various sectors.

Invesco Water Resources ETF (PHO)

  • Performance over 1-Year: 0.55%
  • Expense Ratio: 0.60%
  • Annual Dividend Yield: 0.61%
  • 3-Month Average Daily Volume: 118,234
  • Assets Under Management: $981.0 million
  • Inception Date: December 6, 2005
  • Issuing Company: Invesco

PHO is a multi-cap ETF that invests in U.S. equities of varying market capitalizations and is primarily focused on growth stocks in the water industry, including water utilities and infrastructure companies as well as water equipment and materials companies. This ETF offers targeted exposure to investors who may believe that scarcity issues may prompt a sudden, short-term increase in demand for water treatment companies. Thus, it may not belong in a longterm portfolio. As of 9 May 2020, the fund's top three holdings include: Danaher, Ecolab, and Roper Technologies Inc. (ROP), a manufacturer of industrial equipment, including pumps and equipment for fluid handling.

Invesco S&P Global Water Index ETF (CGW)

  • Performance over 1-Year: 0.25%
  • Expense Ratio: 0.62%
  • Annual Dividend Yield: 1.76%
  • 3-Month Average Daily Volume: 104,408
  • Assets Under Management: $599.2 million
  • Inception Date: May 14, 2007
  • Issuing Company: Invesco

CGW is a multi-cap ETF that invests in water equities of varying market capitalizations in developed markets across the world. The fund follows a blended strategy, investing in value and growth stocks of companies in the water industry, including water utilities, infrastructure companies, and water equipment and materials companies. As of 9 May 2020, the ETF's top three holdings include: American Water Works Company Inc. (AWK), a provider of drinking water, wastewater, and other water-related services; Xylem Inc. (XYL), a manufacturer and service provider for water and wastewater applications; and U.K.-based Halma PLC (HLMA), a health and safety sensor company that develops technologies used for safety analysis, including water safety.