Are Water Futures the Next ‘Big Short’?

Could something that covers 70% of the Earth’s surface prove to be the next in-demand commodity?

Dr. Michael Burry was one of the main protagonists of 2016’s Oscar winning film The Big Short. The movie explained the financial intricacies of the housing crisis in 2008 through the lense of three investing entities who saw the whole thing coming, and profited. In its conclusion, the filmmakers stated that Dr. Michael Burry, after being one of the few that profited from the 2008 crash, is investing in only one commodity nowadays: water.

So how can something that is so abundant serve as the next winning investment ticket? After all, tap-water is incredibly cheap, oceans cover the majority of the earth’s surface, and for God’s sake, water literally falls from the sky!

While water-centric investments have seen significant upticks in recent years, they still seem to be mostly under the radar for many investors and the American public at large.

But on closer inspection, alarming facts start to paint a clear picture. First of all only about 3% of the world’s water is freshwater, and most of that is trapped in glaciers. Therefore, only 0.007% of the world’s freshwater is accessible. This small proportion has proved sufficient thus far, but with an exponentially growing human population, the finite amount of water is becoming ever more concerning.

While desalination technology exists, the expense included is not predicted to be decreased anytime soon. At current costs, desalination remains prohibitively expensive for large sectors of the world’s population. Desalination is currently only cost efficient enough to provide 0.2% of the world’s water. How much would it cost to increase this? For even half of the U.S.’s freshwater demands to be met by desalination, at least 100 sizable new power plants would have to be constructed just to supply the energy for the process.

Additionally, the infrastructure which enables current water delivery is in jeopardy. The American Society of Civil Engineers has made projections of America’s spending on the infrastructure needed in the future against what spending will be. According to their projections, within the next 5 years, the U.S.’s spending will be insufficient by more than 84 billion. And for anyone who thinks that these civil engineers’ are projecting an unlikely doomsday scenario should feel free to take up these suspicions with the residents of Flint, Michigan.

Even if the funds are found to match infrastructures’ needs and new methods of generating freshwater are found, displacement could make water a scarce commodity as well. In fact U.S. researchers from the Oceanic and Atmospheric Administration have projected that as many as 13 millions people in the U.S. alone could be displaced by 2100. Hence, even if new infrastructure is built or power plants established in major American cities, the may be under water with large portions of the population displaced within a lifetime.

So much like the financial crisis in 2008 must have seemed to Dr. Michael Burry, the future of human’s water supply looks dire. But this could spell profit for savvy investors who capitalize on the impending restricted supply and increased demand. But even better, investment in the future of water can also help limit the worse possible scenarios that could arise around water. Current large scale investment could make 2100 a year in which water is much more expensive, but affordable. Without investments now, 2100 could see major portions of humanity on the brink of dying from thirst.

Here are some ways to invest in water:

  • Dow Jones Utility Index (DJU): The highest performing in the Dow Jones Industrial Average, this Index is outperforming the rest of the Dow thanks to water, and is performing relatively well compared to other utilities indexes
  • Guggenheim S&P Global Water Index ETF: While performing comparatively worse compared to the S&P than DJU is to the Dow, this fund is specific to water and not utilities in general. This is the play for someone looking to make an all-in type move on the future of water
  • American Water Works Company (AWK): The country’s largest publicly traded water and water service provider, this investment dials down even more that the Guggenheim and bets that this frontrunner in the privatization of utilities game will be a winning horse
  • Palisades Water Index: This index track the global water market. This hedges bets on the notion that any country that invests heavily in successful filtration or manufacturing will turn a pretty penny in future trades

These are only some of the options for the future of water, and the ROI on any of them is unsure. What is sure, however, is that the current state of affairs around water domestically and abroad is not sustainable. Major changes will take place in the next century to ensure this fundamental component of biological life remains accessible. Further, if someone can predict these changes and invest accordingly will be drowning in profits.