Water's critical importance to our economy was highlighted in a rather dramatic fashion in the critically acclaimed movie "The Big Short."
The film concluded with an ominous slide stating that Michael Burry, famed for his foresight in predicting the 2008 financial crisis, had shifted his investment focus solely to water post-crisis.
Although this statement wasn't entirely accurate, it did spark a wave of curiosity and interest: Why not invest in water?
Indeed, when it comes to commodities, water is frequently overlooked in favor of more traditional energy resources. However, it's arguably just as vital, if not more so.
The global trends surrounding water usage and demand, especially for clean, potable water, paint a concerning picture. Factors like population growth, urbanization, and climate change are continuously intensifying the stress on water supplies.
For instance, the United Nations has projected that by 2025, an estimated 1.8 billion people will live in areas plagued by water scarcity, with two-thirds of the world's population potentially facing water-stressed conditions.
In this context, thematic ETFs focused on water present an avenue for investors. These ETFs typically invest in companies involved in the treatment, distribution, and technology of water, making them a proxy for investing in this vital resource.
Let's explore three of the most popular thematic ETFs that allow investors to tap into the vital and increasingly scarce resource of water, as determined by the ETF Central screener.
Invesco Water Resources ETF (PHO)
PHO currently stands as the most popular water-themed ETF in the market, boasting $1.9 billion in assets under management. This ETF passively replicates the NASDAQ OMX US Water Index, which includes a variety of companies actively involved in the water industry.
PHO offers a concentrated portfolio with only 41 holdings, giving it a tilt towards mid-cap equities that blend value and growth investment styles.
The top four companies in the index provide a glimpse into the diversity of the portfolio. Ferguson PLC, with a weight of 8.37%, is a leading supplier of plumbing and heating products. Ecolab Inc (NYSE:ECL)., weighing in at 7.91%, specializes in water treatment, purification, cleaning, and hygiene technologies.
Danaher Corp (NYSE:DHR), with a 7.72% weight, is known for its design and manufacture of professional, medical, industrial, and commercial products and services, many of which are water-related.
Finally, Roper Technologies (NASDAQ:ROP) Inc., holding 7.60%, focuses on engineered products and solutions, including water metering and water quality testing equipment.
Investors should expect a 0.60% expense ratio when investing in PHO, which is relatively standard for a thematic ETF of this nature. Additionally, the ETF offers a tax-efficient 0.47% 30-day SEC yield.
First Trust Water ETF (FIW)
FIW represents the second most popular water-themed ETF in the market, with AUM of approximately $1.4 billion. This ETF tracks the ISE Clean Edge Water Index.
The selection criteria for the ISE Clean Edge Water Index are quite specific. It screens companies based on their revenue generation from the potable and wastewater industry.
Additionally, it filters out companies with lower market capitalization and liquidity. The result is a focused collection of 36 stocks that represent key players in the water industry.
While the top holdings in FIW share similarities with those in PHO, there are notable differences. FIW includes companies like Waters Corporation (NYSE:WAT), Agilent Technologies (NYSE:A), and Xylem, which are not top holdings in PHO.
Waters Corporation specializes in analytical instruments for water quality testing, Agilent Technologies provides lab equipment and services for water analysis, and Xylem focuses on water technology solutions, including treatment and infrastructure.
Historically, FIW has demonstrated strong performance, outpacing PHO. Over 10 years, FIW has delivered an annualized return of 11.67%, compared to PHO's 10.04%.
This superior performance, combined with a slightly lower expense ratio of 0.53%, makes the NYSE-listed FIW an attractive option for investors seeking exposure to the water industry.
Invesco S&P Global Water Index ETF (CGW)
CGW stands as the third most popular in this niche with AUM of $934 million. It tracks the S&P Global Water Index, which includes a diverse range of companies involved in water utilities, infrastructure, equipment, instruments, and materials.
A distinct feature of CGW is its heavy international focus. U.S. stocks constitute only about 56% of its 49 holdings, with the remainder coming from a variety of developed and emerging market countries including the U.K., Switzerland, Canada, Brazil, Japan, China, and others.
However, the inclusion of international stocks has impacted its performance, with CGW lagging behind both PHO and FIW in terms of returns. Over the last 10 years, CGW has delivered an annualized return of 8.778%, which is lower compared to the returns of the other two ETFs.
Despite this, some investors might find the global diversification offered by CGW appealing at a 0.57% expense ratio, especially those looking to spread their investment across different geographical regions in the water sector. This diversification can provide a hedge against regional-specific risks and tap into various growth opportunities worldwide.
This content was originally published by our partners at ETF Central.