With concerns over water scarcity in some regions of the world, the popularity of water as a commodity is gaining traction. There are several ways investors can invest in water to gain exposure to this commodity within their investment portfolio.
What Water Is
Freshwater is a vital natural resource with a finite supply. Increased demand, especially in areas where supply is limited, can put upward pressure on the price of water, which can impact users. To that extent, water is a valuable commodity with financial value for those who can find ways to invest.
The price of water is based primarily on supply and demand. For example, agricultural and electricity demands can directly impact water prices, as can a decrease in supply due to a prolonged drought.
Freshwater is used in large quantities to drive various aspects of the economy, including agriculture, manufacturing, utilities, mining, as well as public supply for consumers and businesses. When demand exceeds supply, users pay more for water and in some cases can even have their water access rationed. Because none of these users can do without it, water is considered a critical commodity on the planet.
Investors who want to capitalize on the price movements of water have several options, including buying water futures on the exchange or more indirectly by investing in “water” stocks or investing in exchange-traded funds (ETFs).
Key Takeaway: Water is a valuable commodity with investment value for investors who want to diversify their portfolios by acquiring water-related assets and investments.
Investing In Water Directly
Outside of purchasing water rights from a water source, such as a river, stream, or groundwater source, it isn’t easy to invest directly in water. The problem with water rights is that they don’t provide any intrinsic value, and there’s no active trading market for them. Water rights aren't standardized (as compared to an ounce of gold, for example), which makes them a less viable type of investment. The issue of water rights in many parts of the country is also often highly political and contentious.
The closest thing to investing directly in water would be to buy water futures. Prompted by California’s worsening heat and drought conditions, in 2020, the Chicago Mercantile Exchange launched the first water market futures contracts tied to water prices in the state. The market offers investors, hedge funds, farmers, and municipalities the opportunity to hedge bets on the future price of water.
The water futures market works much the same way as other commodities markets, such as enabling farmers and suppliers to manage risk associated with the changing market prices of commodities. Water futures contracts allow purchasers to lock in a price today to protect against the possibility of rising prices in the future. For example, by agreeing to a three-month forward contract to buy water at $500 per acre-foot, a futures trader has locked-in that purchase price, regardless of the eventual price of water three months later.
Key Takeaway: Outside of buying water rights, which can be difficult, there aren’t any practical ways to invest directly in water.
Investing in Water Indirectly
Investors with a long-term outlook and who want to add water-related investments to their portfolio have plenty of options through indirect investments. These options are accessible through stock exchanges and can be purchased through a brokerage account.
Investing in companies that rely heavily on the water market to generate revenue is a good way to invest in water. An excellent place to start researching water stocks is by looking at the holdings of a water index such as the Dow Jones U.S. Water Index (DJUSWU). The index lists 29 of the top water-related companies in the U.S., including beverage producers, utilities, water treatment and purification, water-related equipment makers, and companies involved in desalination plants.
Water Index Funds and ETFs
For investors who would rather invest in more broadly diversified index funds and ETFs, there are several options. Index and ETF funds are designed to track the performance of a related index by investing solely in the companies listed on the index.
Among the more widely traded funds is the Invesco Water Resources ETF (PHO) that invests in U.S. exchange-listed companies that produce products for conserving and purifying water in homes, businesses, and industries. Another popular water fund is First Trust Water ETF (FIW), which invests in the top 36 U.S. companies involved in potable and wastewater industries. On a more global scale, the Invesco S&P Global Water Index ETF invests in the top 50 water-related companies worldwide.
Key Takeaway: Indirect investments in water such as water-related stocks and funds can be made by investors through a brokerage account.
Researching Water Investments
When investing in any stock, index fund, or ETF, investors can benefit by conducting due diligence in the security to understand the investment potential, the risks associated with the company and the industry, and how the security fits into a portfolio investment strategy.
When researching an individual stock, investors often consider several critical factors, including the company’s growth history (i.e., revenue and earnings growth), financial condition (i.e., strong balance sheet), market position, and management strength. Company information can be found on investment websites such as Seeking Alpha, which provides performance histories, charts, and in-depth analyses on their prospects. Many water-related companies may appear on Seeking Alpha's Utility Stocks screener.
When researching index funds and ETFs, in general, many investors investigate key factors such as:
- The funds’ objectives (are they compatible with your own objectives?)
- Fees and expenses (are they competitive with similar funds?)
- Trading volume (are they thinly traded which could pose a liquidity problem)
- Time in operation (do they have a long track record).
Investing Tip: Investors can use financial websites such as SeekingAlpha.com to conduct thorough research into water-related stocks and funds.
Water is a vital resource with a finite supply, making it a valuable commodity used throughout the economy. Investors can attempt to capitalize on the growing trends in water renewal, conservation, treatment, and purification, by investing in water-related companies or index funds that invest in them.
This article was written by
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