Consider these water ETF and stock options.
Commodities went on a tear in 2022 thanks to soaring inflation and supply chain constraints, with the prices of crude oil and natural gas going through the roof. However, one commodity that largely escaped attention was water. Despite being one of the most important and increasingly scarce commodities on Earth, there aren’t many ways investors can gain exposure to water as an investment. Water futures contracts are too expensive and advanced for most retail investors, and storing bottles in your garage to resell later isn’t prudent either. A better way might be to buy the stocks of companies in the industrial, consumer staples or utilities sectors that are involved in the sourcing, purification or distribution of water. For increased diversification, investors can buy exchange-traded funds, or ETFs, that hold a portfolio of these companies. Here is a list of seven great water stocks and ETFs to buy in 2022.
American Water Works Co. Inc. (ticker: AWK)
American Water Works is the largest water utility company in the U.S. with a market capitalization of around $28 billion. The company has a reputation for growth, having completed over 20 acquisitions in 2021 along with numerous upgrades to its infrastructure, notably a $3.4 million investment in its aging Pennsylvania water pipelines. Recently in August, the company announced the completion of its acquisition of the city of Eureka, Missouri’s water and wastewater systems, which serve approximately 4,000 customers, and the commencement of construction on a new water pipeline for the city. The company also beat analyst expectations for its second-quarter earnings, posting earnings per share, or EPS, of $1.20, above the consensus estimate of $1.14. Currently, the company pays a dividend yield of 1.7% and, like most utility stocks, is far less volatile than the market, with a beta of 0.43.
Xylem Inc. (XYL)
Xylem designs, manufactures and services a variety of technology products used in water and wastewater processing, making it a member of the industrial sector. The company is divided into three segments: water infrastructure, water measurement, and control systems. It operates via an elaborate sales network of distributors, resellers, third-party white labeling services and direct-to-buyer sales to push a vast product line of pumps, valves, controls, meters and leak-detection equipment. Although hard-hit by COVID-19, the company has since recovered, recently posting second-quarter earnings of 66 cents per share, beating analyst estimates for 55 cents per share. This marks the fourth consecutive quarter that Xylem has surpassed consensus EPS estimates. Depending on upcoming management guidance, that streak may point to a continued turnaround for the company.
Primo Water Corp. (PRMW)
Primo is a consumer staples stock that primarily sells bottled-water products to consumers, with notable brands including Earth2O, Crystal Springs, Sierra Springs, Mountain Valley and Deep Rock. The company also sells filtration equipment and coffee and water dispensers to enterprise clients. Recently, Primo announced the acquisition of Highland Mountain Water, a leading independent distributor of Primo’s Mountain Valley premium water brand. The company also released its inaugural environmental, social and governance, or ESG, report, detailing its commitment to achieving carbon neutrality and discontinuing single-use plastics. Another noteworthy highlight was the company’s exit from its Russian business, which only brought in revenues of $14 million in 2021, or less than 1% of its overall 2021 revenue.
Invesco Water Resources ETF (PHO)
PHO passively tracks the Nasdaq OMX U.S. Water Index, a market-cap-weighted index of 38 U.S.-listed companies involved in purifying or conserving water for home, business or industrial use. In terms of holdings, the ETF is rather concentrated in mid-cap companies. Notable stocks include American Water Works as the largest holding, followed by Roper Technologies Inc. (ROP), Ecolab Inc. (ECL), Danaher Corp. (DHR) and Xylem. Water machinery companies dominate, constituting 32% of the ETF, followed closely by water utilities at 18%. With assets under management, or AUM, of $1.7 billion, PHO isn’t as popular as regular index funds, but is decently large for a thematic ETF. However, its niche style and higher-than-average fund turnover come at a higher expense ratio of 0.6%, or around $60 in annual fees for a $10,000 investment.
Invesco Global Water ETF (PIO)
Investors can also diversify internationally for their water exposure. Doing so can hedge against the possibility of the U.S. performing poorly for an extended period of time. A great pick here is PIO, which passively tracks the Nasdaq OMX Global Water Index. PIO holds 52 global water stocks along the same criteria as PHO does. Fifty-seven percent of the ETF’s holdings are still based in America, but 13% are in the U.K., 8% in Japan and 7% in Switzerland, along with smaller portions in France, Brazil, Spain, the Netherlands, China and Canada. PIO is less popular than PHO, with lower but still sufficient AUM of $281 million. However, due to its holdings of international stocks, the ETF does charge a heftier expense ratio of 0.75%.
Invesco S&P Global Water Index ETF (CGW)
CGW has the same goal as PIO: Track a global portfolio of water companies. The difference is in the underlying index being tracked. Whereas PIO tracks the Nasdaq OMX Global Water Index, CGW opts for the S&P Global Water Index. The difference? A slightly higher allocation to American (60%) and U.K. (15%) water stocks, but a lower allocation to all others. The two ETFs are fairly similar in their high concentrations of industrial stocks (50% for CGW versus 48% for PIO), but CGW’s allocation to utilities stocks is 40%, compared to 24% for PIO. CGW is also much more popular, with higher AUM of $1 billion and a lower expense ratio of 0.57%. However, given their similar holdings yet different indexes, a good use for CGW and PIO could be as tax-loss harvesting pairs.
First Trust Water ETF (FIW)
FIW tracks the ISE Clean Edge Water Index that screens for stocks in the potable and wastewater industry that meet requirements for market capitalization, liquidity and weighting concentration. The end result is a concentrated portfolio of 36 holdings selected to represent the top players in the industry. The portfolio is rebalanced semi-annually to ensure that no single stock rises enough to dominate the ETF. With a median market capitalization of about $5 billion, the fund is dominated by mid-cap stocks, with notable holdings including American Water Works, Xylem, Aecom (ACM) and Essential Utilities Inc. (WTRG). FIW has posted a decent 10-year average annual return of 13.1%, which has outperformed its benchmark, the Russell 3000 Index. It is also one of the cheaper funds on this list, with an expense ratio of 0.53%.
7 best water stocks and ETFs to invest in:
— American Water Works Co. Inc. (AWK)
— Xylem Inc. (XYL)
— Primo Water Corp. (PRMW)
— Invesco Water Resource ETF (PHO)
— Invesco Global Water ETF (PIO)
— Invesco S&P Global Water Index ETF (CGW)
— First Trust Water ETF (FIW)
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7 Best Water Stocks and ETFs to Buy originally appeared on usnews.com
Update 08/11/22: This story was published at an earlier date and has been updated with new information.
