Dive into Water Investments for a Diverse Portfolio
Water isn’t just the source of life—it’s also becoming a key asset for diversifying your investment portfolio. With its increasing scarcity, much like gold and oil, water presents unique opportunities for savvy investors.
Key Takeaways
- Water is arguably the most critical resource on the planet.
- Water shortages can trigger social, political, and economic disruptions.
- The scarcity of water is intensifying due to climate change, pollution, and rising demand.
- Investors can leverage water-related assets and investments to diversify their portfolios.
- Various indexes, mutual funds, and ETFs offer retail investors exposure to water-related securities.
Understanding Water Investments
Water is one of the most vital yet increasingly scarce resources. Although approximately 70% of the earth’s surface is covered in water, over 97% of it is saltwater, which is not suitable for drinking, crop irrigation, or most industrial applications. Out of the remaining 3%, only about 1% is readily accessible for human use.
Rapid industrialization and agricultural expansion have intensified global water shortages. Some of these areas include China, Egypt, India, Israel, Pakistan, Mexico, several regions of Africa, and parts of the United States such as Arizona, New Mexico, California, and West Texas.
Pollution has further aggravated the need for clean water. Examples such as the dead zone off the Gulf Coast of the U.S. caused by fertilizer runoff, and instances of contaminants like methyl tertiary butyl ether (MTBE) in well water illuminate the crisis. Internationally, similar situations in countries like Russia and China underline the global nature of this issue.
$55 Billion in Clean Water Investments
On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law. This bipartisan bill allocates $1.2 trillion in spending, including $55 billion specifically for creating clean drinking water. With these investments, the legislation aims to expand access to safe drinking water for households, businesses, schools, and child care centers in both urban and rural areas. It also provides for the elimination of lead service pipes and modernizes infrastructure.
Popular Water Investment Indexes
Several indexes have been created to track water-related investment opportunities:
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The Dow Jones U.S. Water Index: Comprising around 29 stocks, this index features various domestic and international water companies with a market capitalization of at least $150 million.
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The ISE Clean Edge Water Index: Launched in December 2000, this index represents 35 companies specialized in water distribution, filtration, flow technology, and other water-related solutions.
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The S&P 1500 Water Utilities Index: A sub-sector of the S&P 1500 Utilities Index, it includes companies like American States Water (NYSE: AWR) and Aqua America (NYSE: WTR).
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The S&P Global Water Index: Originating in 2001 and comprising 50 companies worldwide, this index focuses on businesses involved in water utilities, infrastructure, and water equipment.
The MSCI Global Sustainable Water Index offers an international perspective by targeting companies that earn a significant portion of their revenue from sustainable water services.
Global Water Stress
According to the United Nations, approximately 2.3 billion people live in water-stressed countries, consuming more than 25% of their fresh water resources annually. Additionally, by 2030, 700 million people could be displaced due to water scarcity.
How to Invest in Water Securities
A broad range of firms are profiting from water-related industries, such as beverage manufacturers, utilities, water purification companies, and equipment makers specializing in pumps, valves, and desalination units. Exploring the holdings of water indexes can provide investment opportunities in companies from industry giants to small-caps like Layne Christensen.
The bottled water market also highlights significant potential, especially with increasing demand in countries such as China and Mexico.
If individual stock picking isn’t appealing, various ETFs, mutual funds, and unit investment trusts (UITs) offer opportunities to invest in water. Major options include the Invesco Water Resource Portfolio ETF (PHO), the iShares U.S. Utilities ETF (IDU), and the Allianz Global Water Fund.
Investing in Water as a Commodity
The Chicago Mercantile Exchange (CME) has introduced tradeable water futures, allowing investors to bet on the future price of water in California as represented by the Nasdaq Veles California Water Index.
Insights from Michael Burry
In The Big Short, Michael Burry, the founder of Scion Capital, pivoted into water investments after successfully shorting the housing market. His strategy involves cultivating food in regions abundant in water and selling it in water-scarce zones, although retail investors might find focusing on water stocks more feasible.
Insight into Water Stocks
Water stocks encompass businesses related to irrigation, utilities, water treatment, and other water-centric industries. Investors can buy individual stocks or invest in mutual funds and ETFs with significant exposure to water sectors.
Conclusion
The rising demand for clean water is propelling investment opportunities in this domain. Existing options for adding water-based investments to a portfolio are plentiful, catering to diverse investment strategies and risk appetites. Whether through direct stocks, funds, or ETFs, the avenues to invest in this critical resource are indeed plentiful.
Related Terms: investment opportunities, sustainable investing, commodity trading, utility stocks.
References
- U.S. Geological Survey. “How Much Water is There on Earth?”
- World Resources Institute. “Aqueduct Water Risk Atlas”.
- World Resources Institute. “17 Countries, Home to One-Quarter of the World’s Population, Face Extremely High Water Stress”.
- Environmental Protection Agency. “State Reports On MTBE”.
- National Oceanic and Atmospheric Administration. “Wet Spring Linked to Forecast for Big Gulf of Mexico ‘Dead Zone’ This Summer”.
- The White House. “Updated Fact Sheet: Bipartisan Infrastructure Investment and Jobs Act”.
- Clean Edge. “ISE Clean Edge Water Index (HHO)”.
- S&P Dow Jones Indices. “Global Water Index: Data”.
- MSCI. “MSCI Global Sustainable Water Index (USD)”.
- United Nations. “Water Scarcity”.
- International Bottled Water Association. “Bottled Water 2020: Continued Upward Movement”, Page 13.
- Science of the Total Environment. “The State of Desalination and Brine Production: A Global Outlook”, Page 1344.
- Invesco. “Invesco Water Resources ETF”.
- Blackrock. “iShares U.S. Utilities ETF”.
- First Trust Advisors. “First Trust Water ETF (FIW)”.
- Invesco. “PIO - Invesco Global Water ETF”.
- CME Group. “Nasdaq Veles California Water Index”.
- New York Magazine. “Michael Burry, Real-Life Market Genius from The Big Short, Thinks Another Crisis Is Coming”.
