The Water Energy Nexus

Includes: CGW, FIW, PHO, PIO
by: David McMillan

Needless to say, the conversations are flowing. Over the course of the past year or so, there has been a good amount of commentary on the four water ETFs that are available to investors today. For reference, these are:

  • PHO – PowerShares Water Resources Portfolio
  • PIO – PowerShares Global Water Portfolio
  • FIW – First Trust ISE Water Index Fund
  • CGW – Claymore S&P Global Water Index Fund

While much has been written about the merits and drawbacks of each ETF and its underlying holdings, let’s explore the macro level drivers that make the case for investing in water based ETFs, as well as why selecting one or multiple of the above funds is a good strategy for those concerned about future water consumption, the water-energy nexus and those looking for a clean technology play within this sector.


When water is brought up as an investment opportunity, concerns invariably surface around consumption, the <1% of surface fresh water supply, and the increasing demands created by rapidly expanding populations and industries within both developed and developing countries.

There can be no doubt, the numbers are truly staggering. The last time I spoke with Steve Hoffman, the developer of the Palisades Water Index and the Palisades Global Water Index (which licenses the index to PowerShares), he shared with me a slide that highlighted the consumption issues we are facing with familiar everyday examples.

With consumption on the rise, world population in the 20th century tripling and water use for human purposes during the same period growing six-fold, the exponential growth in population is supporting a similar world trend in water consumption and water stress. The United Nations estimates that 2 out of 3 people will be living in water-stressed conditions by the year 2025, double our current level. This type of growth is a critical component in understanding what areas of the water industry will play key roles in our future, and where opportunities lie for investment.

(For those interested in further details, Professor Al Bartlett says the “greatest shortcoming of the human race is our inability to understand the exponential function”. Click here.)

The issue of consumption compounds the environmental issues we see globally with water scarcity and water stress. While it is clear that the most acute conditions are found in Africa and West Asia, there is an increasing problem here in the US, as illustrated in the following charts.

The first chart shows a color-coded map of global water stress, depicting areas that are currently suffering from over-exploitation. Large areas of the mountain west and west coast are reaching critical levels.

As water stress trends are largely attributed to areas undergoing rapid industrial development and community growth, we should expect to see larger areas of China and eastern India to show greater levels of over-exploitation in the next couple of decades. China’s population alone is doubling every 12.5yrs at its current rate, and will continue to have enormous water demands through agricultural and industrial development.

Click here for larger map.

In addition to water overuse and scarcity is the decline in water availability witnessed over the last 50 years. Many regions of the US and Europe in particular are now seeing significant water availability losses, as can be seen below.

Click for here larger map.

Energy-Water Nexus

The move to energy independence, efficiency and improved renewable sources has been squarely featured in recent debates, both politically and non-politically within the investment community. What receives less attention, however, is the direct relationship between energy creation and water resources and how inextricably linked they are to one another. In fact, there is still no national research program directed specifically at understanding the relationship between the energy industry and water use.

At last year’s CTSI (Clean Technology and Sustainable Industries) Conference in Boston, there were several presentations that tackled the issues we now face with an energy-water nexus. Energy production requires a reliable and abundant supply of water that accounts for approximately 40% of fresh water withdrawals in the US, with 71% of that going to fossil fuel generation. Due to the intense nature of using water in electricity production (second only to agriculture), it is now estimated that powering a typical US family home consumes more water from electricity generation than is used in its daily water consumption.

What is more, as solutions are found to safeguard and create potable water supplies, the relationship between energy and water continues its vicious cycle. Fresh water solutions such as desalination plants are incredibly energy intensive and continue to propagate increased energy demands that by their very nature feed increased water needs through fossil fuel burning energy plants.

While renewable energy sources may ultimately provide an alternative here, many countries now looking at ways to offset desalination plants with renewable solutions, there are more immediate gains to be seen within efficiency and technology improvements within the water industry itself, as well as improvements to aging infrastructure, storage and transportation solutions.

Investing in water is not as simple and straightforward as investing in other commodity groups, but this is likely to change in upcoming years. To be clear: water investing is not a direct investment based on some arbitrary value per gallon of water, but a strategic investment in the many sub-sectors that are involved in its extraction, regulation, security, conveyance and resource management on both the domestic and global stage.

With increased water scarcity, overuse, population expansion, climatic changes and a global energy infrastructure heavily dependent on water needs, the issues surrounding ‘blue gold’ will garner a lot of investor attention in the next few decades as the world attempts to deal with this inescapably significant conundrum.

Disclosure: I hold positions in PIO and PHO ETFs.

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