Investing in Water — How to invest in water through direct and indirect water investments

About 70% of the earth’s surface is covered by water, but over 97% is salt water. This means water is a vital resource with a finite supply, making it a valuable commodity used throughout the entire economy. It is estimated that the global water demand will continue to rise, posing significant challenges for the future. However, for investors, these challenges present interesting opportunities for investing in water.

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Global water demand is projected to increase by 55% by 2050, primarily due to growing industrial demand. Water scarcity has already become an issue in some parts of the world. In general, the price of water is likely to rise significantly in the future. There are several ways investors can invest in water to gain exposure to this commodity in their investment portfolio. In this post, I will go over the different ways of investing in water, ranging from direct water investments and water futures to indirect water investments, such as pure-play water stocks and water ETFs.

Why investing in water?

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When looking for investment opportunities, I always try to imagine what our future might look like and what the investment themes for the next few decades might be. One investment theme that particularly interests me is investing in water. You probably learned in school that most of our planet is covered with water, and you may think that water is an unlimited resource. While that is true to some extent, it’s not necessarily true for freshwater / drinking water.

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Due to climate change, global warming, rising world population, and increasing water demand from industrial production, agriculture and growing cities, the availability of fresh water is becoming a major issue in some parts of the world. While water shortages are creating a humanitarian crisis in some countries, it also presents interesting investment opportunities for investors.

Consider for example water utilities and innovative companies that offer technologies, products and services to address water scarcity. However, before we take a closer look at water investments, let’s address the question of whether water investments are unethical.

Is investing in water unethical?

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Before I get into the water industry and the different ways to invest in water, you may be wondering if investing in water is unethical. Personally, I think it depends. As is so often the case in capitalism, it’s a two-sided medal. There certainly are corporations that control large water resources, denying parts of the world’s population access to clean water and instead selling bottled water with a hefty price tag. However, there are also companies that actually help solve the problem of water scarcity through innovative water technology and efficient water infrastructure.

One example of a potentially unethical water business that is often brought up by locals and environmental activists is Nestlé. The company owns and controls vast supplies of fresh water, and critics accuse Nestlé of tapping groundwater in developing countries and selling it to consumers in plastic bottles. This business practice is certainly questionable for some. However, Nestlé as one of the world’s largest suppliers of bottled water, must strike a balance between protecting water and maintaining a necessary level of control and access to water supplies.

I think investors have to decide for themselves what investments they consider unethical and, more importantly, to what extent. Personally, I’ve invested in Nestlé, the largest food and beverage company in the world, through my stock portfolio. The company has an interest in conserving water supplies to sustain its business over the long term. Therefore, Nestlé is constantly addressing water supply issues and improving water efficiency across its entire business.

How to invest in water

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With water scarcity comes a number of opportunities to invest in water for forward-thinking investors. The greatest economic benefits of improved water supply and sanitation, and better management of water resources, will be felt in the countries with the most severe water challenges. Investing in the health of people, ecosystems and more efficient water use is an investment that not only provides immediate economic benefits, but also ensures future economic growth.

Investors can invest in direct water investments or, in particular, companies focused on water scarcity solutions. There are a variety of innovative companies developing solutions to reduce water usage and effectively treat wastewater. These innovations range from converting seawater to freshwater to implementing smart meters and smart devices to reduce water consumption in the first place. Companies have recognized that finding solutions to water challenges is an area with significant growth potential. So, let’s now take a closer look at the opportunities for investing in the water industry.

Direct investments in water

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Direct investments in water are rather difficult to realize for private investors. It is theoretically possible to acquire water rights to a water source (e.g. rivers, lakes or groundwater sources). However, this can be ethically controversial and, depending on the region, also politically difficult to realize. Unlike the stock market, water rights are not standardized. There also is no active market to trade water rights, which presents further challenges for investors who want to invest in water.

Water futures are probably the closest thing for investors to make direct investments in water. The Chicago Mercantile Exchange (CME) introduced the first futures contracts for the water market in 2020. The futures on water are based on the Nasdaq Veles California Water Index (Ticker: NQH2O) and are therefore linked to the water prices in California.

The Nasdaq Veles California Water Index futures offer investors, hedge funds, farmers and municipalities the opportunity to hedge against the price risk associated with the scarcity of water in the largest water market in the US. For active traders it’s also a way to speculate on the fluctuations of water prices.

Water stocks

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Apart from buying water rights or trading water futures, there are no other practical ways to invest in water directly. However, indirect investments in water, such as water-related stocks, can be easily made by investors through a brokerage account. A good way to start investing in water is to invest in companies whose revenues are heavily dependent on the water market.

Companies looking to profit from water-related businesses include beverage manufacturers, utilities, water treatment and purification companies, and manufacturers of equipment such as pumps, valves, and desalination plants. An excellent starting point for researching water stocks is a water index. Below are some of the most popular indexes that track various water-related investment opportunities:

  • Dow Jones U.S. Water Index
  • ISE Clean Edge Water Index
  • S&P 1500 Water Utilities Index
  • S&P Global Water Index
  • MSCI Global Sustainable Water Index

How to find the best pure-play water stocks

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In addition to looking at a water index, another way to research stocks for thematic investing is to look at the holdings of popular ETFs in the sector. In this case, looking at ETF holdings can be helpful in identifying companies involved in the water industry and the most popular pure-play water stocks. For example, currently the top 10 holdings of the Invesco S&P Global Water Index ETF are as follows:

  1. American Water Works Inc (NYSE: AWK) — Utilities
  2. Xylem Inc (NYSE: XYL) — Industrials
  3. Veolia Environnement SA (ENXTPA: VIE) — Utilities
  4. Severn Trent PLC (LSE: SVT) — Utilities
  5. United Utilities Group PLC (LSE: UU.) — Utilities
  6. Essential Utilities Inc (NYSE: WTRG) — Utilities
  7. Geberit AG (SIX: GEBN) — Industrials
  8. Halma PLC (LSE: HLMA) — Information Technology
  9. Pentair PLC (NYSE: PNR) — Industrials
  10. Suez SA (ENXTPA: SEV) — Utilities
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You will notice that most of the positions in the Invesco S&P Global Water Index ETF are either utilities or companies from the industrial sector. However, most of these stocks are not pure-play water stocks, but rather diversified companies. Examples of pure-play water stocks would be Xylem (NYSE: XYL), Badger Meter (NYSE: BMI), and Consolidated Water (NASDAQ: CWCO — seawater desalination). If anyone knows of other interesting pure-play water stocks, please let me know in the comments.

Personally, I’ve invested in Xylem and I have Badger Meter on my watchlist. Both of these companies are pure-play, sustainable water stocks that address water scarcity by developing innovative water solutions through smart technology. They offer water, wastewater and energy solutions that monitor the efficiency of water infrastructure. Both Xylem and Badger Meter give exposure to the smart city megatrend, providing solutions for efficient water management.

Water index funds and ETFs

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If you don’t like picking individual stocks, ETFs and index funds offer plenty of opportunities to invest in water. This can be ideal for investors who prefer to invest in more broadly diversified water index funds and water ETFs. Index funds and ETFs are designed to track the performance of a corresponding index by investing exclusively in the companies listed in the index.

Investing in a water ETF can be an easy way to gain exposure to the water industry with just one fund. A typical water ETF invests in water utilities and companies involved in water treatment, sewer and pipeline construction, and equipment. Examples of popular water ETFs are:

  • Invesco Water Resources ETF (PHO)
  • Invesco S&P Global Water Index ETF (CGW)
  • Invesco Global Water ETF (PIO)
  • First Trust ISE Water Index ETF (FIW)
  • iShares U.S. Utilities ETF (IDU)
  • iShares Global Water ETF (IH2O)

Risks of water investments

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Investments in water can provide substantial, stable, long-term returns and make a meaningful contribution to the investor’s asset allocation. Mixing your investments with water stocks, for example, can provide diversified, risk-efficient returns. However, investing in water also comes with some unique risks. Obvious risks are risks caused by nature and climate change, such as heat waves and droughts.

However, there are also other issues to consider such as the affordability and quality of drinking water, regulatory risks such as water being a “human right”, and risks associated with the provision of drinking water. Some water stocks are also rather thinly traded on stock exchanges, which can lead to increased market volatility. Price changes can be more sensitive to smaller numbers of traders buying and selling the shares. A lack of liquidity can lead to a higher bid-ask spread.

Conclusion: Portfolio diversification by investing in water

Water is arguably the most important resource on earth. The price of water is based primarily on supply and demand. Therefore, water scarcity can lead to social, political and economic disruption. However, like any other scarcity, water scarcity creates interesting investment opportunities. Water consumption on earth is expected to increase steadily in the coming decades. Because of its importance, investors can diversify their portfolios by investing in water-related assets and investments.

There are numerous opportunities to add water investments to a portfolio and benefit from the global demand for water. Companies around the world are working on innovative solutions to address water scarcity and secure future water needs. Investors can seek to benefit from the growing trends in water renewal, water conservation, water treatment and water purification by investing in water-related companies, pure-play water stocks or index funds. What are your thoughts about investing in water?

The information in this article is intended for educational purposes only and should not be construed as investment or tax recommendation. Trading and investing involves substantial risk of financial loss, in some cases even above the amount invested. Past results are not indicative of future returns.

You can also follow me on Twitter: https://twitter.com/m_hebenstreit

Originally published on February 1, 2022.

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Father, Equity Trader, Investor, Digital Entrepreneur. Passionate about Investing, Stocks, Business and Web3.

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Michael Hebenstreit

Michael Hebenstreit

Father, Equity Trader, Investor, Digital Entrepreneur. Passionate about Investing, Stocks, Business and Web3.

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