Water is one of the planets most coveted and widely used resources. Like other commodities, such as oil and gold, water assets can add significant diversification to any portfolio.
One way to gain exposure to the water industry is through a water exchange-traded fund (ETF). These ETFs invest in companies involved in the treatment and purification of water, as well as its distribution. Some notable names include Germany-based BASF SE (BAS.DE), 3M Co. (MMM), and ITT Inc. (ITT).
As an essential commodity, water ETFs are often used as a defensive position in a portfolio. However, to the extent that water scarcity becomes a growing threat, these ETFs could be a significant offensive play as well.
Compared to other types of ETFs, the water ETF universe is small, composed of five funds that trade in the United States, excluding inverse and leveraged ETFs, as well as ETFs with fewer than $50 million in assets. These ETFs do not invest in water as a commodity or in water rights. Instead, they focus on companies involved in water resources, infrastructure, utilities, and related industries. Water ETFs have underperformed the S&P 500, which posted a one-year trailing total return of -12.2% as of Sept. 2, 2022. The best-performing water ETF based on performance over the past year is the First Trust Water ETF (FIW)
We examine the best three water ETFs below. All numbers below are as of Sept. 6, 2022. In order to focus on the funds’ investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
- Water exchange-traded funds (ETFs) have underperformed the broader market in the past year.
- The water ETFs with the best one-year trailing total returns are FIW, PHO, and CGW.
- The top holding of these ETFs are IDEX Corp., Xylem Inc., and American Water Works Company Inc., respectively
- One-Year Trailing Total Returns: -14.7%
- Expense Ratio: 0.53%
- Annual Dividend Yield: 0.39%
- Three-Month Average Daily Volume: 56.444
- Assets Under Management: $1,214.8 million
- Inception Date: May 08, 2007
- Issuing Company: First Trust
FIW is a multi-cap ETF that invests in a blend of value and growth stocks. It tracks the ISE Clean Edge Water Index. The index is composed of exchange-listed companies deriving a substantial portion of their revenue from the potable and wastewater industry. They are selected according to market capitalization, liquidity, and other requirements. More than 86% of the portfolio is allocated three sectors: industrials, utilities, and healthcare.
The top three holdings of FIW are IDEX Corp. (IEX), a water treatment and infrastructure company; Essential Utilities Inc. (WTRG), an infrastructure company and provider of water, wastewater, and natural gas services; and Xylem Inc. (XYL), a provider of water technology, products and services.
- One-Year Trailing Total Returns: -16.6%
- Expense Ratio: 0.59%
- Annual Dividend Yield: 0.23%
- Three-Month Average Daily Volume: 99,520
- Assets Under Management: $1.7 billion
- Inception Date: Dec. 06.2005
- Issuing Company: Invesco
PHO targets the NASDAQ OMX US Water Index. The benchmark is comprised of US-listed companies that make products for purifying and preserving water for businesses and homes.
More than half of the stocks in the ETFs portfolio are machinery companies and water utilities, with the remaining holdings in life sciences tools and services, building products, software, and chemicals stocks, among others. PHO is a multi-cap fund that holds a blend of both value and growth companies.
The top three holding companies of PHO include Xylem Inc., Danaher Corp. (DHR), which makes instruments and water purification technology for municipal and wastewater treatment facilities; and Ecolab Inc. (ECL), which provides products and services for water management, hygiene and infection prevention.
- One-Year Trailing Total Returns: -23.7%
- Expense Ratio: 0.57%
- Annual Dividend Yield: 1.10%
- Three-Month Average Daily Volume: 60.094
- Assets Under Management: $928.7 million
- Inception Date: May 14, 2007
- Issuing Company: Invesco
CGW is a multi-cap blended fund that tracks the S&P Global Water Index. The index is composed of a portfolio of companies from developed markets representing water utilities, infrastructure, equipment, instruments, and materials. More than 89% of CGW’s portfolio is allocated to industrial and utilities companies.
The top three holding companies of CGW include American Water Works Company Inc. (AWK), a commercial and residential provider of water and wastewater services; Xylem Inc.; and Essential Utilities.
The comments, opinions, and analyzes expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyzes contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
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