Water stocks: Should you ride the wave?

It's the most important resource on earth. Can it be part of your portfolio?

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Key takeaways

  • Water is the world's most critical resource, and water crises are escalating around the globe.
  • New technologies and systems are being created and deployed to help provide solutions to the escalating clean water shortage crisis.
  • Water-themed investments might offer attractive long-term investing opportunities.

If you have clean running water, it might be easy to take it for granted. But billions around the world don't. Here's a short list of extreme water crises happening right now:

  • Water levels at Lake Mead (the largest US reservoir in terms of water supply) have dropped so low that, for the first time ever, reductions in water deliveries for Arizona, Nevada, and New Mexico were mandated.
  • Coastal South African cities recently reported "day zero" events, where dams have run dry and it is likely that residents will not have running water.
  • Italy declared a state of emergency for some areas in the northern part of the country, as extreme drought has made parts of the Po River (Italy's longest river) run dry.
  • Water levels in India's Yamuna River near Delhi (the world's second largest city by population) hit a 57-year low this summer, leading Indian officials to ration water supply to residents.
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And the list goes on. Water insecurity is indeed a worldwide problem. The World Health Organization estimates about 2.2 billion people do not have access to clean drinking water and two-thirds of the total world population face severe water scarcity. Perhaps more concerning is that the problem will likely escalate: Due to population growth, some estimates say that, by 2030, the world will need 40% more clean water.*

Since there are no new sources of water on the planet, revolutionary technology and systems will be needed to utilize the supply we have to meet this growing challenge—and the investing implications could play out for decades.

Investing in water

Recent reports from the World Economic Forum estimate the global water industry at $483 billion, as of mid-2022. Some investors have ridden this wave: The chart below highlights the relatively strong performance of the S&P Global Water Index since 2001 (the year this index was created), having outperformed both the S&P 500 and MSCI AC World, on a total return basis.

ESG investing

Water-themed investments fall under the larger sustainable investing approach, which is based on environmental, social, and governance (ESG) factors.

Water stress investing opportunities include those that address water scarcity (providing access to water to those that do not have it), water quality (providing clean water to those who do have access), and water security (improving the infrastructure and efficiency of systems that do have clean water).

These opportunities can span multiple sectors and industries, with a wide range of applications. For example, water utility companies face massive challenges due to water lost on clean water networks, declining water sources and supply, aging infrastructure, increasing natural disasters that are causing or exacerbating existing problems, and contaminated resources. This can lead to increasing inefficiencies and higher operating costs. For instance, due to leaks in pipes and other water infrastructure, the US loses enough water every year to meet the annual supply to its 10 largest cities.*

Janet Glazer, manager of the Fidelity® Water Sustainability Fund (FLOWX), notes that stress on public budgets will make it unlikely for governments around the world to solve water-accessibility issues on their own. "Public companies are likely to be an increasing part of the solution as they deploy innovative solutions to the water crisis," Glazer forecasts.

In addition to traditional infrastructure and services companies like utilities, new technologies/systems for water infrastructure, wastewater treatment, and testing equipment underscore other opportunities. Companies that enable smart water networks, for example, combine the power of advanced sensors, smart meters, software analytics, and intelligent communication networks to allow utilities and industries to measure, monitor, adapt, and innovate continuously through the water cycle.

"I don't see the problem for better solutions to the water crisis going away anytime soon, "Glazer says, "and I think we'll be relying on technology-focused companies to help ethically and cost-efficiently address water-access issues, both in the US and internationally."

Water-themed opportunities

Of course, water-themed investments face risks just as others do. Water company stocks can be impacted by rising rates (which raise the cost of borrowing—a significant cost for capital-intensive companies within the water industry) and supply chain problems (which can make material costs more expensive), among other risks. Water industries, such as water utilities, can also face potentially disruptive regulatory risk—the risk that regulation could impact their operations.

With that said, there are increasing ways for investors who are interested in the water theme to invest in it. And because access to water is a global issue, there are both domestic and international opportunities to be uncovered.

If you are looking to explore water-themed funds, consider the following lists of all mutual funds and ETFs in this group:

Mutual funds ETFs
Fidelity® Water Sustainability Fund ( FLOWX ) Invesco Water Resources ETF ( PHO )
ASN Milieu & Waterfonds ( ASNML ) First Trust Water ETF ( FIW )
Virtus Water Fund ( AWTAX ) Invesco S&P Global Water ETF ( CGW )
Calvert Global Water Fund ( CFWAX ) Invesco Global Water ETF ( PIO )
KBI Global Investors Aquarius Fund ( KBIWX ) Ecofin Global Water ESG Fund ( EBLU )
Ecofin Sustainable Water Fund ( AQUIX ) Global X Clean Water ETF ( AQWA )
Source: Fidelity.com, Morningstar, as of June 30, 2022.

If you want to get a sense of the specific individual stocks that are held in these funds, here are the top 10 holdings of the Fidelity Sustainable Water Fund (FLOWX), as of June 30, 2022:

  • Software and engineered products maker Roper Technologies (ROP)
  • Water and wastewater services provider American Water Works (AWK)
  • Oil and water flowback services provider Tetra Technologies (TTEK)
  • Water systems designer Zurn Water Solutions (ZWS)
  • Water management firm Veolia Environment
  • Enabling technologies firm Teledyne Technologies (TDY)
  • Life sciences and environmental solutions company Danaher (DHR)
  • Safety and hazard equipment maker Halma PLC
  • Water and wastewater treatment firm Evoqua Water Technologies (AQUA)
  • Applied solutions company Idex (IEX)

These companies span multiple sectors and industries, including industrial conglomerates, health care equipment, aerospace and defense, and multi-utilities, with varying degrees of their operations focused on water technology solutions and systems.

Water world

Current estimates of worldwide water stress could be exacerbated by the effects of climate change, with changing rain seasons, shifting natural water storage, severe droughts, and flooding representing significant unknowns. This lends even more importance to the need for industry solutions. Given the size and scope of the challenge that the world faces, this megatrend could play out for decades. If you think that addressing the water crisis aligns with your investing objectives, there are more ways than ever to ride the wave.

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