Often-Ignored Water ETFs Are Sizzling Hot: Here's Why

The utilities sector is generally not as glamourous as technology.Utilities Select Sector SPDR Fund XLU is up only 4.6% this year versus the 17.3% rise in the SPDR S&P 500 ETF Trust SPY. But one corner of the utilities sector — water utilities — has remained steady.

Invesco Water Resources ETF PHO is up 17.8% this year and has gained 51.2% in the past year. The water fund has added 7.6% in the past 13-week period. The fund seems to be all fired up if we compare it with the apparently red-hot tech ETF Technology Select Sector SPDR Fund XLK that has attained 41% in a year, 16.8% in the year-to-date frame and 6.8% in the 13-week period.

Still, water ETFs are often ignored by investors as the largest ETF PHO has an asset base of $1.7 billion despite debuting long back in 2005. In comparison, XLU has an asset base of $11.76 billion (the fund XLU hit the market in 1998).

Water scarcity has become a global crisis with climate change, pollution, poor sanitation, an ever-expanding population, and increasing consumption. Wastewater runoff from agriculture, industry and expanding cities, especially in developing nations, is another major issue (read: Tap Water With These ETFs).

Water scarcity may hurt the consumer staples sector the most, per Barclays (LON:BARC) Capital analysts, per a source. The source article indicated that Barclays Capital analysts forecast global freshwater requirements for food production to increase 40% by 2030.

Then there is President Biden’s infrastructure deal. According to the White House, the infrastructure deal will include $579 billion in new spending. Going by a CNBC article, the proposal will allocate $266 billion in non-transportation infrastructure, including $73 billion for power, $65 billion for broadband and $55 billion for water (read: ETFs to Gain on Biden's Infrastructure Deal).

Inside the Recent Surge

Water utility stocks surged last week amid severe drought conditions in California and some other states in the country, per CNBC. California’s governor pledged for voluntarily reducing citizens’ water use by 15% to fight the drought condition.

Reservoirs across the state, which are used for agriculture, drinking water and fish habitat, have fallen to alarmingly low levels and some counties have already mandated water restrictions, per a Guardian article. In 2020, Arizona experienced its driest monsoon season on record.

Given this, the water industry seems an excellent investment option to tap the growth. We have highlighted some ETFs that could be excellent picks.

Invesco Water Resources ETF (PHO)

This fund provides exposure to U.S. water utility stocks that create products to conserve and purify water for homes, businesses and industries. It tracks the Nasdaq OMX US Water index and holds 37 securities in the basket. The fund has amassed $1.7 billion in AUM and charges 60 bps a year in fees per year.

First Trust Water ETF (FIW)

This ETF follows the ISE Clean Edge Water Index, which is a modified market capitalization-weighted index comprising exchange-listed companies that derive a substantial portion of their revenues from the potable and wastewater industry. Holding 36 stocks, it has amassed $1.05 billion in its asset base while charging investors 54 bps in annual fees (see: all the Industrials ETFs here).

Invesco S&P Global Water Index ETF (CGW)

This ETF provides global exposure to developed market securities including water utilities, infrastructure, equipment, instruments and materials by tracking the S&P Global Water Index. It holds 58 stocks in its basket with AUM of $991.1 million and an expense ratio of 0.57%.

Invesco Global Water ETF (PIO)

This fund tracks the Nasdaq OMX Global Water Index, holding 51 stocks in its basket. It has accumulated $296.6 million in its asset base while charges 75 bps in annual fees.

Ecofin Global Water ESG Fund (EBLU)

This fund follows the Ecofin Global Water ESG Net Total Return Index, which comprises companies across the globe and throughout the water cycle that seems positioned to benefit from the pursuit of solving the water supply/demand imbalance. It holds 45 stocks in its basket and has gathered $47.6 million in its asset base. The fund charges 40 bps in annual fees.

Bottom Line

The water utilities sector has emerged as a new ESG (Environmental, Social, and Governance) bet. As we all know that the ESG is the new big thing in the coming era, investors with a long-term view can bet on the above-mentioned water ETFs.

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