Water: The Alternative Investment Opportunity

There are just three basic things that humans cannot live without: water, food, and oxygen. The problem is that the human population is growing too rapidly, to the extent that there are genuine worries about the ability of the earth’s environment to sustain this population.

The demand for water mounts and pressure on finite water resources intensifies. According to the UN, currently, 2.2 billion people do not have access to safely managed drinking water, and 4.2 billion, or 55% of the world's population, lack safely managed sanitation. There is no doubt that at the current consumption rate, the situation will only get worse. WWF forecasts that by 2025, two-thirds of the world’s population may face water shortages. And ecosystems around the world will suffer even more.

Climate change, which is also closely tied to population growth, will also lead to greater pressures on the availability of water resources. Many futurologists predict water wars in the near future unless humanity finds a way to supply the population of more than 8 billion people, something that clearly will not happen.

According to the Guardian, millions of Americans are at risk of being disconnected from their water supply due to rising bill prices. In 2019, Americans paid an average of $ 104.00 per month or $ 1,250.00 per year for water, and since 2012 water bills have risen 31%, outpacing inflation.

Between 2010 and 2018 water bills increased 154% in Austin, Texas, where the average annual bill rose from $ 566 in 2010 to $ 1,435 in 2018, despite drought mitigation efforts. Demand for domestic water, in turn, grew 600% between 1960 and 2014, at a significantly faster rate than that of any other sector.

Overall, we are not in the best situation, we must face the truth. On the other hand, it could be an investment opportunity.  

As the global population increases, water demand will most likely increase. In this context, investing in water companies and water stocks could be an alternative option. If the water sector grows and the market being rather economically resilient, investments in this industry should lead to fruitful financial returns. Investors could also gain better diversification benefits by involving investments in water within the portfolio.

Sustainable investing is about investing in progress and recognizing that the companies that solve the world's greatest challenges are the best positioned to grow. OECD projects water demand to increase by 55% globally between 2000 and 2050. The increase in demand will come mainly from manufacturing (+400%), electricity (+140%), and domestic use (+130%). In the face of these competing demands, there will be little scope for increasing water for irrigation.

The question then is how to invest in water?

One of the options could be water ETFs or baskets of water-related shares aimed at replicating the performance of the water market. For example, Invesco Water Resources ETF is the most popular water-themed fund on the market, and also the most liquid. Invesco Water Resources ETF has an MSCI ESG Fund Rating of A based on a score of 7.04 out of 10.

PowerShares Global Water Portfolio ETF follows the Nasdaq OMX Global Water Index, investing primarily in large-cap growth water industry stocks across the world. It has a special focus on European water stocks, covering companies in Switzerland, France, and the UK.

The following chart shows that water ETFs performed quite well during the corona crisis, not only recovering the lost ground but growing to upper levels.

Alternatively, investors could consider private water infrastructure companies, Public Water Stocks (like American Water Works (AWK), Aqua America (WTR), Pentair (PNR) or Suez Environnement (SEV)), Indexes (for example, The Dow Jones U.S. Water Index NASDAQ OMX Global Water Index) or even ESG Funds.

The S&P Global Water Index, on the other hand, provides liquid and tradable exposure to 50 companies from around the world that are involved in water-related businesses. To create diversified exposure, the 50 constituents are distributed equally between two distinct clusters of water-related businesses: Water Utilities & Infrastructure and Water Equipment & Materials. The World Water Market Cap Adjusted Index and the World Water Index tracks the performance of a hypothetical basket of Shares of Companies which have the biggest share of their revenues in either or several of the following investment clusters: Water Utilities, Water Infrastructure, Water Treatment.