Water scarcity around the world continues to rise.
Water may seem like a limitless resource, considering that most of the planet is covered in it. But freshwater, the kind that we need for drinking, farming and to sustain life itself, isn’t infinite. In fact, the World Wildlife Fund estimates that by 2025, two-thirds of the world’s population may face water shortages. The United Nations believes that more than 2 billion people are living in countries that are already experiencing high water stress, and climate change, a rising global population, increased demands from agriculture and the expansion of urban areas are all contributing factors that will only heighten that stress in the coming years. With water scarcity comes a number of opportunities for forward-thinking investors to invest in water — including utilities, water treatment companies and, as of Dec. 7, water futures. Here are seven ways to invest in water today that may bring big profits tomorrow.
Invesco S&P Global Water Index ETF (ticker: CGW)
Investors who are beginning to build their water investment portfolios might want to start with the Invesco S&P Global Water Index ETF. This broad exchange-traded fund is composed of 50 companies involved in the water business — including utilities, infrastructure, equipment, instruments and materials companies. More than half of these companies operate in the U.S., while the rest are spread out across the globe. In terms of sectors, the fund is split largely between industrials (46.3%) and utilities (43.5%). Shares have gained more than 11% year to date, but this water ETF is more of a defensive play than one that will likely bring investors big returns — but the 1.3% dividend yield will help.
Invesco Water Resources ETF (PHO)
Investors who are looking for a more targeted way of investing in water while retaining the diversification of a fund should consider the Invesco Water Resources ETF. Unlike the previous fund, PHO is based on the Nasdaq OMX U.S. Water Index, and it’s focused on tracking companies “that create products designed to conserve and purify water for homes, businesses and industries,” according to Invesco. The ETF holds 36 small- and mid-cap companies across a range of industries, the biggest of which are industrials (51.3%), utilities (20.9%) and health care (15.5%), as of the end of September. More than 97% of these holdings are located in the U.S. The focus on the Nasdaq has helped shares of the Water Resources ETF to climb by 17% year to date. A dividend yield of 0.4% rounds out this ETF nicely.
Invesco Global Water ETF (PIO)
Much like the Water Resources ETF, the Invesco Global Water ETF tracks the Nasdaq OMX U.S. Water Index. The difference is where PIO puts its money — this fund is more diversified, with more of a focus on large-cap growth companies. While 51% of the fund’s holdings are based in the U.S., the other 49% is spread out among the U.K., Switzerland, France and beyond. The 43 stocks in the fund are divided up between a variety of sectors, the largest of which are industrials (44.7%), utilities (30.6%) and health care (11.9%). This mix of stocks has worked out well for investors as shares are up about 12% year to date. A dividend yield of 0.8% provides the cherry on top to entice water investors who are looking for a well-balanced, slow but steady ETF.
American Water Works (AWK)
American Water Works has water and wastewater facilities in 16 states, and the company continues to expand. In the third quarter alone, AWK added 47,000 customer connections, with an additional 19,000 expected by the end of next year. Continued increases in residential demand, plus the beginning of a recovery in commercial demand for American Water Works’ services, helped business this quarter — and hotter, drier weather across several of the states where AWK does business boosted earnings per share by an estimated 6 cents. Speaking of earnings, in the third quarter, American Water Works reported an impressive $1.46 in EPS, an increase of 9.8% year over year, while revenue rose 6.5%. With strong earnings and shares climbing by more than 20% year to date, American Water Works is an excellent addition to any water portfolio.
Ecolab provides a wide range of water treatment, purification and cleaning services to a number of industrial customers, though the company has much more to offer beyond water. Its global health care and life sciences segment, for instance, just had the strongest quarter out of all of Ecolab’s divisions, with sales up 29% in the third quarter. Unfortunately, that was the only bright spot in Ecolab’s recent earnings, as pandemic-related slowdowns continue to batter the company, sending Ecolab’s sales from continuing operations down 6% year over year while EPS declined 24%. Despite its difficulties, shares of Ecolab are up 15% year to date, and Ecolab sees a bright future for itself — one in which the world takes cleaning and treatment services far more seriously than it did before the pandemic.
Danaher Corp. (DHR)
Danaher is a diverse company with a number of water-related businesses in the industrial water treatment and water testing markets. This industrial conglomerate with a $159 billion market cap has a lot more to offer beyond water solutions, and it’s this diversification that has kept Danaher humming throughout 2020. Case in point, in the third quarter, the company reported that revenue from its environmental and applied solutions division (under which its water businesses can be found) declined 1% year over year — meanwhile, revenue from its diagnostics division climbed 18% and life sciences revenue grew an impressive 72.5% year over year. In short, Danaher is an excellent pick for investors who want a bit more diversification from their investment but still want to dip their toes into a healthy water-related business.
Nasdaq Veles California Water Index (NQH20)
Investors could already trade futures of gold, oil and other commodities, but as of Dec. 7, they can now trade futures in water. Specifically, it’s water traded from California’s $1.1 billion water market via the Nasdaq Veles Water Index, which tracks the volume-weighted average transaction prices in five Californian water markets. Each contract represents 10 acres of water, or roughly 3.26 million gallons — but they are financially settled, so investors won’t have to worry about several swimming pools of water showing up at their doorstep. It makes sense that water futures would get their start in California, the largest and most important agricultural market in the U.S., and investors and farmers alike will want to lock in prices of water now before scarcity sends prices up.
Seven ways to invest in water:
— Invesco S&P Global Water Index ETF (CGW)
— Invesco Water Resources ETF (PHO)
— Invesco Global Water ETF (PIO)
— American Water Works (AWK)
— Ecolab (ECL)
— Danaher Corp. (DHR)
— Nasdaq Veles California Water Index (NQH20)
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Update 12/16/20: This story was published at an earlier date and has been updated with new information.