Why A Water ETF May Be A Smart Bet To Juice Buy-And-Hold Portfolios

Water—arguably the most important natural resource on our planet—offers a strong investment case. Companies in the water industry are in a powerful position to gain as both value and demand is expected to grow in the years ahead.

Forecasts published by Global Water Intelligence explain how they expect the value of water to grow in the coming years, saying:

"The value of the global water market, representing the sum of both operating and capital expenditures by utilities and industrial water users on water and wastewater, is expected to grow from $770 billion in 2018 to $914.9 billion by 2023."

In addition to the increasing value, demand will also continue to rise with the ever-expanding global population that requires water to survive. Research by Taikan Oki at the Institute of Industrial Science at The University of Tokyo breaks down exactly how much water each individual requires:

"Fluid intake requirements are 1.5 to 3.0 litres per person per day. However, between 50 and 100 litres of water per person per day are required to ensure basic human health (i.e. water for sanitation). In addition, 3 to 4 m³ per person per day of rain-originated water is consumed in the cropland to produce food for humans."

Consider that the world population is approximately 7.594 billion people and growing rapidly. Each year, headlines on World Water Day (Mar. 22), rightfully point out that global water supplies are under pressure. But human ingenuity also means that innovative companies worldwide work to preserve, treat and recycle water.

Worldwide infrastructure spending is increasing significantly, including the US which is expected to "invest a total of $109 billion per year in water infrastructure over the next 20 years [from 2019]."

The data shows that water is an important financial asset, and thus it makes sense to include water companies in long-term portfolios.

Invesco Water Resources ETF

• Current Price: $44.20
• 52-Week Range: $26.19 - $45.50
• Dividend Yield: 0.41%
• Expense Ratio: 0.60%

The Invesco Water Resources ETF (NASDAQ:PHO) provides exposure to businesses in the water industry. Some of these businesses offer products to conserve and purify water. Others derive revenue from the potable and wastewater industries.

The fund started trading in December 2005, is rebalanced quarterly and reconstituted annually in April.

PHO Weekly Chart

PHO, which has 36 holdings, tracks the NASDAQ OMX US Water index. The top ten businesses comprise about 55% of net assets of over $1.2 billion.

The fund is fairly diversified in terms of industries. Machinery accounts for 30.34% of the fund, water utilities make up 20.10%, health care equipment and supplies are 7.83%, building products are 7.79% and chemicals 7.65% among others.

Wastewater utility company American Water Works (NYSE:AWK), global science and technology innovator Danaher (NYSE:DHR), water, hygiene and infection prevention solutions and services Ecolab (NYSE:ECL), analytical instrument manufacturer Waters (NYSE:WAT) and diversified technology group Roper Technologies (NYSE:ROP) are all US-based firms that lead in the ETF.

Since the beginning of the year, PHO has grown by more than 14% and hit a new record high of $45.50 on Nov. 9. Forward P/E and P/B stand at 27.42 and 4.55, respectively.

In terms of short-term technical charts, PHO is currently overbought and the charts urge caution. Potential profit-taking could pressure the fund toward $42.5 or below, which would give a better entry point for long-term market participants.

Bottom Line

There are several other water ETFs that could also be appropriate for a range of long-term portfolios. They include:

• Ecofin Global Water ESG Fund (NYSE:EBLU)
• First Trust Water ETF (NYSE:FIW)
• Invesco Global Water ETF (NASDAQ:PIO)
• Invesco S&P Global Water Index ETF (NYSE:CGW)

Finally, we'd like to highlight another fund focusing on China, the Global X MSCI China Utilities ETF (NYSE:CHIU). Although it is not a direct play on investing in water, CHIU gives access to China-based firms that derive part of their revenues from water.

According to Aquatech, a platform for water technology, "As demand for water has increased, so too have problems with water shortages, pollution, falling groundwater tables, and flood/drought damages. To tackle these challenges, the Chinese government increasingly encourages foreign companies to engage in the country's water market."

For instance, developers of energy-efficient water treatment, filtration products, pumps and water systems are likely to see business growth in China. Thus, long-term investors may also want to pay attention to Chinese developments. Water is likely to become a core asset class in the country.