How Investing In Water Could Buoy Your Portfolio

How Investing In Water Could Buoy Your Portfolio
Andrew Rummer

over 2 years ago5 mins

  • Water is becoming an increasingly scarce commodity in many parts of the world, due to population growth and climate change.

  • There are plenty of publicly traded companies in the water sector to add to your portfolio between water utilities and firms developing water treatment technologies. And if you want to spread your cash across many companies, there are plenty of water-focused ETFs too.

  • You could skip the stock market entirely and invest in farmland via REITs to make a play on water shortages increasing.

Water is becoming an increasingly scarce commodity in many parts of the world, due to population growth and climate change.

There are plenty of publicly traded companies in the water sector to add to your portfolio between water utilities and firms developing water treatment technologies. And if you want to spread your cash across many companies, there are plenty of water-focused ETFs too.

You could skip the stock market entirely and invest in farmland via REITs to make a play on water shortages increasing.

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There’s no more essential commodity than water. But the world’s supply is dwindling as things heat up. It’s a good time, then, to consider investing in the foundation of all life: water might be just the tall drink your portfolio ordered. 

Why water?

As the global population grows larger and wealthier, demand for fresh, clean water is growing with it. And not just for drinking: a reliable water supply is critical for the world’s food sources.

This week’s United Nations (UN) report on climate change was a timely reminder that the world is warming rapidly, putting pressure on agricultural land. Among many alarming conclusions, the report noted that many areas are already experiencing declines in water availability. 

Diagram of global freshwater use as a proportion of available resources in 2018
Freshwater use as a proportion of available resources in 2018

It takes 15,000 liters of water to produce a kilogram of beef, after all, and an astonishing 12 liters for a single almond. So as the world grows richer and eats better, the UN estimates that global water supply will fall 40% short of demand by the end of the decade.

There’s no arguing that these numbers are scary. But for some investors, this dramatic discrepancy between supply and demand is an opportunity to profit. Among the most high profile water investors is Michael Burry: the doctor-turned-hedge-fund-manager who inspired The Big Short. In the film,  Burry is hugely successful after correctly predicting the subprime mortgage crisis. But the movie ends – rather ominously – with this message:

Closing shot of The Big Short

How do you go about investing in water?

Unlike, say, wheat or coffee, water is one of the few commodities that you can’t buy via agricultural futures markets. What you can do is purchase shares in one of the many companies either providing water to consumers or developing the technology that helps them function.

Water providers are regulated utilities operating under strict limits on how much they can charge customers and how much profit they can make. Utilities – like Pennon (ticker: PNN) – can be attractive, steady investments and often pay a healthy dividend. But if you’re after a higher-risk, higher-reward strategy, water tech firms – like Nomura Micro Science (ticker: 6254) – might be the way to go. 

What about funds?

There are quite a few exchange-traded funds (ETFs) that invest in water firms. Just bear in mind they often charge steeper fees than broad market ETFs that track the S&P 500 or the FTSE 100.

The biggest by assets is the iShares Global Water ETF (ticker: IH2O), which tracks the S&P Global Water 50 Index and has an expense ratio of 0.65%. This fund has added investor cash for 11 straight quarters and climbed far faster than the wider stock market: it’s up about 250% since its inception in 2007, compared to a rough doubling in the MSCI All-Country World Index.

Water ETF returns

The second-largest water ETF by assets is the Invesco Water Resources ETF (ticker: PHO), which tracks the Nasdaq OMX US Water Index, and the third-biggest is the Lyxor World Water ETF (ticker: WAT), which tracks Societe Generale’s World Water Index. Both have a 0.6% expense ratio. 

Many of the top performing companies in these ETFs come from the tech end of the industry, rather than the regulated utility end. Britain’s Halma and Italy’s Interpump, for example, have climbed more than 600% since the iShares water ETF was formed in 2007. 

Performance of S&P Global Water 50 Index members since March 2007
Performance of S&P Global Water 50 Index members since March 2007

For a heftier annual fee, you could pump your money into an actively managed water-focused fund, where a human fund manager selects stocks they think will outperform the market. One example is the Allianz Global Water Fund, which boasts an annual management fee greater than 2% – nearly four times more than the water ETFs charge. Allianz, for its part, argues that such an active approach can supply capital to the companies best placed to improve the world’s water situation with technology. 

Since its inception in October 2018, the Allianz fund has risen 58% – while the S&P water ETF has climbed 80%

Are there any other ways of investing?

You could copy Michael Burry and buy up tracts of irrigated farmland. After all, the UN estimates that 72% of all water is used for agriculture. 

“Food is the way to invest in water,” Burry told New York Magazine in 2015. “That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable.”

It’s not exactly practical to be bidding on farmland, though. Instead, you could buy into Real Estate Investment Trusts (REITs) that focus on agriculture. Gladstone Land Corp. (ticker: LAND) and Farmland Partners (ticker: FPI), for example, acquire land and then rent it out to farmers. 

What’s the catch?

Water stocks have already had a great run over the past year: the S&P Global Water Index is currently trading at 39x its companies’ estimated profits, compared to the MSCI All-Country World Index’s 19x. That makes the water index more than twice as expensive as the wider market at the moment. In contrast, it’s been only about 20% more expensive on average since 2007.

Water ETF relative valuation

Separately, there’s no guarantee that arable land will increase in value. Like most industries, agriculture is improving its efficiency with every passing year and new crop varieties are being developed that aren’t as thirsty. More food produced from the same area of land, potentially with less water, could put downward pressure on land prices. The cost of farmland in the American Midwest, for example, has barely changed in the past decade

Midwestern farmland price changes
Midwestern farmland price changes

Humans will always need water, but a good investment will ride the line between supply and demand. It’s ultimately up to you to decide whether the glass is half full or half empty.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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