Why Water ETFs May Belong In Your Portfolio

February 17, 2017

Describing the water industry as a “collection of fundamentally different businesses that all have something to do with delivery/treatment of clean water but come from varying economic sectors,” Summit points out that the global water industry is huge—“one of the world’s three largest industry groups in terms of embedded capital, along with oil & gas and electrical power.”

From an investment perspective, the business of water centers on water utility companies and companies that provide services and products to these utilities. ETFs offering exposure to this universe tend to focus heavily on utilities and industrial names. In the U.S. alone, according to Summit, there are upward of 50,000 utilities, “plus their diverse supply chain of technology providers, engineering firms, and heavy equipment manufacturers.”

Return Drivers

Driving returns in this investable universe, simply put, is a growing scarcity of water. Here are some key data points to consider from Summit’s research:

  • Less than 1% of all water on Earth is fresh, and appropriate for human use, and pollution and industrial waste are destroying “at an alarming rate” that available supply of fresh water.
  • Global climate change can worsen the outlook for fresh water supplies.
  • “Unchecked” population growth and growing per-capita demand are increasing pressures on water supply. Estimates have world population at 8.5 billion by 2030, from 7.3 billion now—demand from people is soaring.
  • Demand for water for agricultural use is also rising as the population grows. According to U.N. statistics, agricultural water use would have to increase by 50% in the next 35 years or so to meet food production demand—a water supply that doesn’t exist.
  • Demand of water for energy production is also on the rise, and quickly. Energy already takes up about 27% of water usage in the U.S., and that rate is expected to rise another 33% in the next 25 years.

Different ETFs, Different Returns

Here’s an interesting stat: About 25% of the $14 billion invested globally in equity products focused on water is in ETFs, according to Summit. That number is growing, but very little of that is in the U.S. There’s roughly $1.7 billion tied to U.S.-listed water ETFs by our count.

These ETFs are unique in design and exposure. Here are some key differences:

 

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