Tue. Jun 6th, 2023

Water sustainability might not be among the flashiest crises our planet faces, but it’s certainly one of the most important. Put simply: All 7.9 billion humans on this planet need water. And as worldwide water shortages grow, so too does interest in water investing – that is, in companies that help treat, distribute and dispense water.

“Water is at the core of sustainable development and is critical for socio-economic development, healthy ecosystems and for human survival itself,” the United Nations says. It is also a finite and irreplaceable resource that can only be renewed if well-managed.

The problem: It’s currently not well-managed in many parts of the world.

“In 2020, around 1 in 4 people lacked safely managed drinking water in their homes and nearly half the world’s population lacked safely managed sanitation,” according to the World Health Organization and UNICEF. “Billions of people around the world will be unable to access safely managed household drinking water, sanitation and hygiene services in 2030 unless the rate of progress quadruples.”

Anthony Eames, director of responsible investment strategy at Calvert, a leading provider of environmental, social and governance (ESG) investments, says “the reality of water scarcity means that stewardship is a financially material issue for many industries,” adding that numerous companies depend on access to water in their manufacturing supply chains.

“Responsible investors can play a role in water stewardship efforts,” he adds.

A growing spotlight on water sustainability, then, is also shining brightly on water investing. If you’re interested in starting to invest in water, read on as we highlight five mutual funds and exchange-traded funds (ETFs) that focus on this theme.

Data is as of Sept. 9. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.

1 of 5

First Trust Water ETF

  • Assets under management: $1.3 billion
  • Dividend yield: 0.4%
  • Expenses: 0.54%, or $54 annually for every $10,000 invested

Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, has been investing in water via the First Trust Water ETF (FIW, $90.50) in portfolio models for the past four years. 

“I’ve used it in lieu of traditional utility funds,” he says, “but more importantly due to the thesis on the importance of water sustainability, the increased future scarcity of water and the need for more efficient and effective potable water solutions, as well as storage and transportation of the resource.”

The First Trust Water ETF tracks the ISE Clean Edge Water Index, which holds companies in the potable water and wastewater industry with worldwide market capitalizations of at least $100 million. It’s a “modified” market cap-weighted index that, at each semiannual rebalancing, assigns the top 10 stocks by size a weight of 4%, the next 10 a weight of 3.5%, and so on. Thus, larger companies have a greater effect on performance than smaller ones, but those smaller firms have more influence than they would have in a traditional cap-weighted portfolio. 

If you’re doing your water investing via funds, get used to tight portfolios: FIW, for instance, holds just 36 stocks. Top holdings include the likes of conglomerate Danaher (DHR), which has a portfolio of water-quality businesses; Xylem (XYL), which offers up a wide swath of water and wastewater technology products; and American Water Works (AWK), which provides water-utility services in 16 states.

“As the world’s population continues to expand, clean and safe drinking water will be one of the top priorities in order to promote and protect human life,” Milan says. “These companies will have their hands in making this a possibility for nations all around the world.”

MSCI’s ESG Fund Ratings rates First Trust Water ETF at AA – the second-best rating, and within the system’s so-called Leader tier.

Learn more about FIW at the First Trust provider site.

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Calvert Global Water Fund A Shares

Calvert Funds stylized logo
  • Assets under management: $590.7 million
  • Dividend yield: 0.6%
  • Expenses: 1.24%

The Calvert Global Water Fund A Shares (CFWAX, $30.38) is a water investing mutual fund that seeks to track the Calvert Global Water Research Index, CALH2O, a proprietary index comprised of “companies that manage water use in a sustainable manner and are actively engaged in expanding access to water, improving water quality, promoting the efficient use of water, or providing solutions that address other global water challenges.” 

This gives CFWAX access to “the water value chain not found in other strategies” that typically only focus on water-related industries, says Calvert’s Eames.

“We invest in companies representing the supply side, such as water utilities, water infrastructure and water technology companies, as well as on the demand side through investments in companies in water-intensive industries that are leading in their water stewardship and water efficiency,” he says.

The resulting portfolio includes top holdings such as water and hygiene specialist Ecolab (ECL), Xylem and Idex (IEX), a diversified industrial firm that provides water metering and flow technology products and services, among many other things.

Eames adds that CFWAX “also employs a shareholder engagement strategy which seeks to improve companies’ performance on financially material ESG issue areas, including water use and efficiency.” The company’s engagement team works with investor groups and policy makers to drive positive change. It also files shareholder resolutions and manages all proxy voting for the Calvert funds.

Note that CFWAX, which also receives MSCI’s AA rating, is one of the more expensive ways to invest in water. In addition to a 1.24% expense ratio, investors also pay a 4.75% front-end sales load unless their brokerage waives or lessens the load. (Fidelity and Schwab are examples of brokerages that will waive the load on CFWAX.)

If your broker doesn’t waive the load, you might want to consider the ETFs or the no-load water-themed mutual fund on this list instead.

Learn more about CFWAX at the Calvert provider site.

3 of 5

Invesco Water Resources ETF

Invesco stylized logo
  • Assets under management: $2.1 billion
  • Dividend yield: 0.3%
  • Expenses: 0.60%

Invesco’s flagship water-themed fund, Invesco Water Resources ETF (PHO, $58.85)was launched in 2005, making it one of the oldest water investing funds you can find.

PHO tracks the Nasdaq OMX US Water Index, which invests in companies that purify and conserve water for home, business and industrial users. Rene Reyna, head of thematic and specialty product strategy at Invesco, adds that these companies “must be engaged in the Green Economy, which factors in their contributions to improving the water space as determined by Sustainable Business LLC.”

“The Nasdaq OMX US Water Index was the best performing Nasdaq index in July 2021, up 6.0%,” Reyna adds.

Invesco also offers a global version of this fund, the Invesco Global Water ETF (PIO). That said, it’s not nearly as popular, at $330 million in assets, and it trades about 55,000 shares per day on average compared to 165,000 for PHO. 

That’s OK. While the Invesco Water Resources ETF only invests in U.S.-listed companies, many of those businesses – including Danaher, Waters (WAT) and Roper Technologies (ROP) – are multinational operators.

“So while its sister fund, PIO, may provide enhanced international diversification, PHO by no means misses out on the global opportunity of water resource investment,” Reyna says.

PHO earns five stars and a bronze badge from Morningstar for, among other things, strong past performance compared to peers and relatively low costs. It also earns MSCI’s highest ESG rating: AAA.

Learn more about PHO at the Invesco provider site.

4 of 5

Invesco S&P Global Water Index ETF

Invesco stylized logo
  • Assets under management: $1.2 billion
  • Dividend yield: 1.1%
  • Expenses: 0.57%

The Invesco S&P Global Water Index ETF (CGW, $59.80) could be considered a more traditional way of investing in water than PHO or PIO. 

This ETF tracks the S&P Global Water Index, which focuses on the 50 largest companies in water-related businesses across the globe. CGW targets two distinct segments – water equipment and materials, and water utilities and infrastructure – allocating 25 stocks to each.

“By investing in the underpinnings of the water infrastructure, including water utilities, equipment, instruments and materials, CGW offers a different way to invest in the water theme,” Reyna says.

The fund has almost a 50/50 split between U.S. and non-U.S. companies, with the bulk of the non-U.S. holdings coming from Europe. Top holdings from across the pond include French resource-management specialist Veolia (VEOEY), Swiss bathroom-fixture firm Geberit (GBERY) and British life-saving-technology provider Halma (HLMAF).

CGW also earns five stars and a silver badge from Morningstar, as well as an AAA ESG rating from MSCI.

Learn more about CGW at the Invesco provider site.

5 of 5

Fidelity Water Sustainability Fund

Fidelity logo
  • Assets under management: $99.4 million
  • Dividend yield: 0.1%
  • Expenses: 1.00%

Fairly new to the water investing scene is the Fidelity Water Sustainability Fund (FLOWX, $16.51). 

Launched in April 2020, FLOWX invests at least 80% of its assets in water sustainability companies, such as those involved in water resources, treatment or distribution. These can include the companies found in the S&P Global Water Index, but the managers also reserve the right to choose other companies they feel meet the fund’s criteria. 

When the managers do deviate, it’s usually to smaller, growth-oriented companies, which pulls the fund into the mid-cap growth style box.

Morningstar analysts warn that the fund tends toward stocks with low trading volume, which could put the managers in a tight spot should they need to quickly exit a position. And as many themed funds tend to be, FLOWX is fairly concentrated at just 28 holdings, most of which are U.S.-domiciled. The top 10 holdings – which include American Water Works, Roper and Halma – account for more than 66% of the portfolio’s assets, so investors should be wary of concentration risk if they hold the same companies elsewhere in their portfolios. 

Of the five water investing options in this article, FLOWX deserves the most scrutiny before jumping in given its short track record.

“The fund’s portfolio management team is on par for the industry, but still needs to prove its competitive advantage,” Morningstar analysts say.

Still, early on, MSCI’s ESG Fund Ratings rates the product at AA.

Learn more about FLOWX at the Fidelity provider site.