We take a deep dive at the water industry, its typical actors, and the ETFs that expose you to this market.
The importance of water
With energy, water is the single most essential element that we need. Our body is mostly based of water, we grow plants with water, and our energy system is cooled with water. Yet, freshwater is a scarce resource. Only 4% of the total available water on our planet is fresh. Among this 4%, 68% are locked in ice and glacier, and 30% are locked underground. We only have 0.08% of the total water available for our consumption!
Climate change makes it even harder. Water stress is increasing with nefarious consequences in multiple areas of human life:
- Lower agricultural output: droughts in the United States and Europe have created water shortages and drastically reduced the yields (how much is produced) of grain fields such as wheat or corn, essential staples for both humans and feedstocks.
- Energy stress: reduced freshwaters also affect our energy systems. Power plants, especially nuclear, use water to cool down their reactor. France had to cut down its electricity production because the rivers were getting too warm, reactivating coal and gas-fired power plants.
- Rising geopolitical tension: the increased scarcity also exacerbates conflicts between countries. Conflicts can erupt when two countries rely on the same source of water such as a river. Any action taken by the country upstream triggers tension with the other water consumers. Ethiopia is in conflict with Egypt due to the construction of a dam on the Nile river, and China and India are facing the same with the Brahmaputra.
The water industry
Because of how important the water industry is in our life, it is a big business. The water market in the US is estimated to be $109 billion a year. It is expected to experience rapid growth with a CAGR of 7.1% in the next decade.
Most of the freshwater is used by the agricultural sector (70%) followed by industry (20%) and consumers.
The water industry has multiple actors.
First, the utilities. They are the ones ensuring the production and delivery of freshwater. They collect and treat water (either from the sea or from groundwater). Those utilities can be publicly owned or privately owned. When private, they tend to be heavily regulated due to their monopolistic situation. In the US, private water utilities represent 40 to 50% of the total water market. Utilities have both reliable customers and predictable spending because of the constant demand. This means they have a stable source of income and provide reliable business opportunities for the rest of the industry. Typical company is American Water Works, one of the biggest US utilities with presence in 14 states and serving 14 million people.
The main suppliers to these water utilities are also important actors. They are the ones providing equipment and services such as water treatment technologies, pumps, or piping. Xylem is a technology provider. They provide pumps, sensors, analytics, everything needed for American Water Works to operate.
Finally, the wastewater industry is the last big chunk. Those are plants removing pollutants and contaminants from wastewater. It can ship the water back to a river or return it to the utility to be sent back to the consumer. Veolia Environnement provides water treatment and waste management services.
Bottled water is not considered part of the industry but rather falls into food and beverages.
A deep dive into the ETFs
The water sector is essential in building a sustainable future. As seen above it plays a key role in all main areas of human life. Water stress is also projected to increase its relevance. Because of this everlasting demand and projected growth, water might be an interesting option to integrate in an investment strategy. Exchange-traded funds are a great way to get broad exposure to the sector.
Despite the promising growth opportunities, not all the water industry sector can be invested in. Many utilities are state-owned or municipal and therefore not listed on public markets. Some water ETFs, therefore, tend to be over-indexed on the services and manufacturing part of the water industry.
So who are the main ETF players?
Invesco Water Resources ETF- The US standard
Invesco Water Resources follows the NASDAQ OMX US Water Index. This is an index that follows companies involved in the purification and treatment of water across all industries (agriculture, industry, & retail). Water utilities only represent a sixth of its composition. The ETF does not have a high level of diversification with 5 companies capturing almost 40% of the index (Xylem, Danaher, Ecolab, American Water Works, & Roper Technologies).
What we like: large assets under management (very liquid)
What we don’t like: low diversification, higher expense ratio compared to its peers, no global exposure in a market dominated by international players
- Morningstar Rating: 5/5
- One-Year Trailing Total Returns: -9.08%
- AUM: $1.74B
- Expense ratio: 0.60%
- Issuing company: Invesco
- Ticker: PHO
Invesco S&P Global Water Index ETF - The Globalist
Invesco S&P Global Water Index ETF follows the... S&P Global Water Index. It has global exposure with still most of its holdings in the United States (61%). Its sectoral allocation is closer to the market reality with 40% of its holdings invested in utilities. The index is slightly more diversified with the top 5 holdings capturing 32% of the index (American Water Works, Xylem, Essential Utilities, Ferguson, & United Utilities Group).
What we like: large assets under management (high liquidity), global exposure
What we don’t like: low diversification, higher expense ratio compared to its peers, still very US focused
- Morningstar rating: 5/5
- One-Year Trailing Total Returns: -17.25%
- AUM: $992.9M
- Expense ratio: 0.57%
- Issuer: Invesco
- Ticker: CGW
Ecofin Global Water ETF - The ESG
Ecofin Global Water Index ETF is a bit more mission-driven. They include ESG criteria and liquidity thresholds to include companies in the index. All companies also have at least 50% of their revenues from water-related activities. The 5 biggest companies represent more than 35% of the portfolio (Ferguson, Ecolab, American Water Works, Geberit, Veolia Environnement).
What we like: global exposure, ESG considerations, lower expense ratio
What we don’t like: high concentration, low total assets under management (not very liquid)
- Morningstar Rating: 4/5
- One-Year Trailing Total Returns: -18.41%
- AUM: $64.86M
- Expense ratio: 0.40%
- Issuer: Ecofin
- Ticker: EBLU
First Trust Water ETF - The old guard
First Trust Water follows the ISE Clean Edge Water Index. It only invests in US companies listed on the Nasdaq or NYSE. It is pretty similar to Invesco Water Resources in terms of companies yet with a greater spread in terms of weighting. The 5 biggest companies represent less than 20% of the portfolio (IDEX, Essential Utilities, Xylem, Advanced Drainage Systems, AECOM). The ETF is one of the longest standings with its inception dating back to 2000.
What we like: large AUM, standard expense ratio, low concentration
What we don’t like: US-focused
- Morningstar Rating: 5/5
- One-Year Trailing Total Returns: -7.14%
- AUM: $1.26B
- Expense ratio: 0.53%
- Issuer: First Trust
- Ticker: FIW
Global X Clean Water ETF - The new kid in town
Global X Clean Water follows the Solactive Clean Water Index. This index takes an international approach similar to Invesco S&P 500 Water Global with the US representing 64% of the index. The overall investing approach is similar to its peers (water treatment, infrastructure, services, and equipment). Utilities represent 47% of the index. Global X mentions ESG proxy voting guidelines but does not outline the vote taken for the companies of the index.
What we like: International exposure especially for the Asian market
What we don’t like: Very low AUM (low liquidity level)
- Morningstar Rating: N/A
- One-Year Trailing Total Returns: -13.39%
- AUM: $6.79M
- Expense ratio: 0.50%
- Issuer: Global X
- Ticker: AQWA
Note: this article is for information only and does not represent any investment advice.