Estimate Time7 min

Water stocks: Time to take the plunge?

Key takeaways

  • Aging infrastructure, extreme weather events, and pollution are threatening the planet's freshwater supply.
  • Government spending and private-sector innovation are addressing the global water crisis, potentially creating fluid investment opportunities.
  • Companies focused on water infrastructure, treatment, and technology may be poised to drink up some of the growing demand for water-related services.

Depending on where you live, it might be easy to be complacent about access to clean, safe water. But a time may come when simple routines like idly washing your hands or doing the dishes won't be such casual tasks. That's because the water we depend on faces what many experts believe is an accelerating crisis—from climate change, pollution, extreme weather events, and deteriorating infrastructure.

Indeed, the scope of the global water crisis is expanding, which has the potential to impact financial performance across numerous business sectors.

  • About 2 billion people globally do not have access to safe drinking water and some 4.2 billion people do not have safely managed sanitation services.1
  • Extreme weather events are becoming more frequent—like flooding in New York City and saltwater intruding into the Mississippi River—which is hindering aging infrastructure.
  • Costs stemming from an increase in extreme weather events are mounting. According to the National Oceanic and Atmospheric Administration (NOAA), the earth has historically experienced 3 "billion-dollar disasters" per year. By 2021, the number had grown to 20 per year.
  • Lake Mead, the largest manmade water reservoir in the US, bordering Colorado and Arizona, has experienced historically low levels in recent years amid drought, increased water demand, and the effects of climate change.
  • Geopolitical risks and regional isolationism may amplify the water crisis, especially given that many developing nations depend on help from western countries.
Fidelity Viewpoints

Sign up for Fidelity Viewpoints weekly email for our latest insights.

Wave of investment

These are just a few flashpoints in our planet's increasingly fragile water security. It's possible that our freshwater supply may diminish, threatened by climate change, contamination, and drought. In fact, water scarcity is expected to worsen as the global population continues to boom. By 2030, demand for global freshwater is projected to exceed supply by 40%.2

The stakes are high—as the water crisis deepens, so too will the economic strain.

Good news is rippling to the surface in the form of government stimulus. In addition to programs across Europe, China, and the Middle East, the US Bipartisan Infrastructure Law provided $50 billion to improve the nation's drinking water and another $43 billion bolstering water infrastructure resilience.

At the same time, a sprawling range of companies involved in the water industry are increasingly responding to the needs of this pressing global crisis—and creating investment opportunities that, in some cases, may benefit from US infrastructure spending.

"Government stimulus is flowing into the water sector for the first time by a significant amount since the 1970s," says Brian Aronson, who manages the Fidelity® Water Sustainability Fund (). "The good thing about the water sector is you can have quality investment theses in water-related stocks while also addressing other environmental and sustainable issues."

Buoyant water stocks

The water sector is less sensitive than the overall market to economic cycles, says Aronson, adding that government spending should help further position water stocks as defensive plays during downturns. The ongoing necessity to provide clean water, upgrade fragile infrastructure, and generate innovative water-management strategies should provide a tailwind to the sector. In fact, water-related stocks have made a splash for investors over the long term, as seen in the chart below:

Past performance is no guarantee of future results. Performance of the S&P Global Water Index compared with the MSCI World Index since 2010. Source: FactSet.

Companies at the intersection of water sustainability and potential investment opportunities span various sectors, including industrials, utilities, and technology. They encompass firms that manage water sources, purify water on a large scale (for instance, turning saltwater into drinking water), construct or maintain water infrastructure (like pumps and pipes), or develop technology for more efficient water usage and safety.

Water stress can affect many aspects of the economy, given that this resource is critical to just about everything. Take manufacturing, for example. Recent trends toward onshoring or nearshoring, driven by pandemic-related supply-chain hiccups, have seen large corporations building facilities closer to their primary markets. Aronson says these plans "must include ways of dealing with potential water shortages." In turn, demand may grow for wastewater recycling services.

Businesses in water-intensive industries—think beverages, technology, semiconductors—are increasingly under pressure to improve their water usage. It's estimated that a typical semiconductor plant gulps between 2 and 4 million gallons of water per day to clean equipment and rinse silicon wafers. Assisting semiconductor firms and other companies with strategic methods to advance their water management practices may present potential opportunities for water companies.

One of the best ways to help solve the water crisis, Aronson says, is addressing water conservation. There's water loss at multiple stops along the supply chain—from the utility to the faucet in the kitchen. In response, industrial water companies are investing in technologies to help shore up conservation. Companies including Xylem () are developing advanced metering, which implements real-time tracking of water usage and identifies problems like leaks. The integration of new and innovative smart valves means water utility companies can follow a variety of data and analytics to fine-tune flow rates, pressure, and temperature. Meanwhile companies like Energy Recovery () are creating technological advancements needed for water desalination.

"There are investment opportunities that can really leverage these factors," Aronson says.

One of the outcomes of climate change is more extreme weather events, which puts significant stress on already underfunded infrastructure. Increases in natural disasters, such as flooding, can lead to pollutants flowing into water sources.

"Extreme weather events are really exposing the problems that we have in the water sector," Aronson says. As such, utilities are required by the Environmental Protection Agency to assess water for contaminants on a more frequent basis. This requires increased investment in solutions for testing, measurement, diagnostics, and contaminant reduction.

Water sector risks

Aronson points out that government spending can sometimes be potentially delayed or repurposed for other areas. Furthermore, a new US administration could enter office and theoretically put the brakes on some of the spending earmarked for the water sector. However, clean water has historically enjoyed bipartisan support.

Inflation is another factor to consider. If inflationary pressures persist and interest rates remain higher for longer, utilities can potentially pass increased costs on to customer bills. However, utilities are often seen as proxies for the bond market, meaning that higher-for-longer interest rates could potentially make the dividend yield in the sector not as attractive as it has been historically.

Fidelity® Water Sustainability Fund: Top 10 holdings:

  • Pentair Plc ()
  • Tetra Tech Inc. ()
  • Xylem Inc. ()
  • Danaher Corp. ()
  • Chart Industries Inc. ()
  • Ingersoll Rand Inc. ()
  • Stantec Inc. ()
  • Roper Technologies Inc. ()
  • Severn Trent Plc ()
  • Veolia Environment ()
The top 10 holdings made up 57.8% of the total portfolio as of September 30, 2023. Any holdings, asset allocation, diversification breakdowns, or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The top 10 holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different.

Research stocks, ETFs, or mutual funds

Get our industry-leading investment analysis, and put our research to work.

Find stocks

Match ideas with potential investments using our Stock Screener.
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. 1. UNICEF & WHO report published June 2019 2. World Economic Forum report published March 2023

Investing based on environmental, social and corporate governance (ESG) factors may cause a strategy to forgo certain investment opportunities available to strategies that do not use such criteria. Because of the subjective nature of sustainable investing, there can be no guarantee that ESG criteria used by Fidelity will reflect the beliefs or values of any particular client.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Past performance is no guarantee of future results.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

The MSCI World Index tracks large and mid-cap stocks across 23 countries. The S&P Global Water Index measures 100 global companies involved in water-related businesses, including utilities, infrastructure, equipment and materials.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917