We cannot survive without water. As a result of the increasing global population, climate change and the degradation of lakes and rivers, water resources are coming under pressure. In addition to scarcity, establishing and maintaining water systems typically requires significant capital investments. These factors have not gone unnoticed on Wall Street, which now regards water as an important commodity.
The 2021 edition of the United Nations World Water Development Report highlights:
“Agriculture currently accounts for 69% of global water withdrawals, which are mainly used for irrigation but also include water used for livestock and aquaculture. This ratio can reach up to 95% in some developing countries… [T]he world would face a 40% global water deficit by 2030 under a business-as-usual scenario.”
Amidst such ecological challenges, market participants are seeking ways to invest in water, especially via exchange-traded funds (ETFs). US President Joseph Biden’s emphasis on modernizing infrastructure is also bringing attention to water utilities, as well as the technology to improve water infrastructure. Many analysts debate whether fresh water could eventually become the world’s most critical resource.
In recent months, we covered the Invesco Water Resources ETF (NASDAQ:PHO). So far in the year, PHO is up more than 24%. By comparison, the S&P 500 index returned 18.3% year-to-date (YTD). Today’s article discusses two more ETFs that could appeal to a number of investors.
1. First Trust Water ETF
Current Price: $89.27
52-Week Range: $57.59 - $89.55
Dividend Yield: 0.42%
Expense Ratio: 0.54% per year
The First Trust Water ETF (NYSE:FIW) invests in companies that generate a significant amount of their revenues from the potable and wastewater industry. The fund started trading in May 2020. Its net assets stand at $1.23 billion.
FIW, which tracks the returns of the ISE Clean Edge Water Index, currently has 36 stocks. About 42% of the fund is in the leading 10 names. In terms of sectors, industrials lead with 56.85%. Next are utilities (20.35%) and health care (13.18%).
Technology group Danaher (NYSE:DHR) whose products are used in life and environmental sciences; Pentair (NYSE:PNR), which focuses on filtration solutions and water quality systems; Agilent Technologies (NYSE:A), which offers instruments and software for the laboratory workflow; utility group American Water Works (NYSE:AWK); and IDEXX Laboratories (NASDAQ:IDXX), which provides products and services for water testing, are among the top names in the roster.
YTD, the fund has returned more than 23% and hit a record high in mid-August. It’s trailing P/E and P/B ratios of 33.63 and 4.42 point to an overstretched valuation level. A potential decline toward the $85 level or below would offer a better margin of safety.
2. Invesco S&P Global Water Index ETF
Current Price: $58.75
52-Week Range: $39.81 - $59.08
Dividend Yield: 1.33%
Expense Ratio: 0.57%
The Invesco S&P Global Water Index ETF (NYSE:CGW) invests in a range of global firms, including water utilities as well as those that focus on infrastructure, instruments, equipment and materials. Since its inception in May 2007, net assets have grown to $1.15 billion.
CGW, which tracks the returns of the S&P Global Water Index, has 58 holdings. In terms of sector allocation, industrials get the biggest slice with 48.51%, followed by utilities (42.12%) and information technology (6.45%).
The top 10 holdings comprise about 57% of assets. Close to 55% of the businesses come from the U.S. Others are based in the UK (14.91%), France (9.23%), Switzerland (8.1%) and China (2.61%).
Among the largest stocks in the fund are American Water Works, manufacturer of pumping equipment Xylem (NYSE:XYL); Veolia Environnement (OTC:VEOEY), which offers environmental solutions with a focus on water; Switzerland-based plumbing supplies maker Geberit (OTC:GBERY); Pentair; and UK-based water utility group Severn Trent (OTC:STRNY).
CGW returned more than 25% YTD and 44% in the past year. Like FIW, it also hit a record high in recent days. Trailing P/E and P/B ratios are 23.58 and 3.56, respectively. Potential buy-and-hold investors would find better value around $55 or below.