Water is a very important part of our lives, and an industry focused on providing usable water to meet everyday needs is growing. With greater attention on improving aging infrastructure, investors may also consider a water-related exchange traded fund to capitalize on the potential build out ahead.
On the recent webcast, Dive into the Water ETF Space, Jeremy Goff, Director at Tortoise, argued that there are six core investment themes that can drive returns in the water industry.
First off, Tortoise expects supply and demand imbalances, largely in the form of supply shortages, to rise globally. The investment requirement in infrastructure and the shift of that investment source from public to private are also two factors that could support further growth.
Technology improvements can help make water use and distribution more efficient, along with improving how we treat water. Water prices have also been increasing at a faster pace than oil prices since the 1980s, with a steadier path and with much less volatility. Lastly, the regulatory and political climate are favorable for both infrastructure and technology improvements.
“Water is a critical, essential asset to a growing population,” Goff said. “We believe the need for investment in water infrastructure is clear. Water infrastructure providers and related service providers should be positively impacted by such investment.”
Click here to watch the webcast On-Demand to earn CE Credit
Water, like other commodities, is a finite resource, with less than 1% of all water on earth able to be consumed by humans. Consequently, Goff argued that the water value chain is very infrastructure intensive as we divert potable water to consumers, and thus, very expensive. For instance, according to the American Water Works Association, at least $1 trillion is required to restore existing water systems and build new infrastructure over the next 25 years.
“With existing U.S. water infrastructure crumbling due to inadequate investment and other areas of the U.S. lacking essential infrastructure, sizable investment is expected to ensure safe and reliable water supply,” Goff said.
Along with personal water usage, water is mainly used in other global industries. Specifically, agriculture makes up a hefty 70% of global water demand while industry usage makes up 19%.
“The water demand footprint for an individual reaches beyond just personal use,” Goff said. “Water is required to generate not only the crops we consume, but the crops we use as feedstock for the cattle we use for milk or food. Water is used heavily by utilities to generate the power we use, and is an input in many areas of our lives that we don’t associate with water usage.”
Moreover, Goff mentioned that we waste a lot of water globally as almost half of all water use globally is wasted or used inefficiently, which leaves room for innovation and improvement. One driver of returns in the water industry will include those that focus efficiency of water transportation and usage.
Consequently, investors who are interested in tapping into the water industry’s growth potential can take a look at water-related ETFs, like the relatively new Tortoise Water Fund (BATS: TBLU), which will try to reflect the Tortoise Water Index of water companies.
Matthew Weglarz, Director and Portfolio Manager at Tortoise Index Solutions, explained that the underlying Tortoise Water Index stands out from the competition due to its indexing methodology, which eschews traditional market cap-weighted themes. The TBLUE Index incorporates fundamental weighting to seek diversification, qualification as a registered investment company and higher orientation to water-related businesses.
The underlying index also implements a form of smart beta indexing strategy, specifically a revenue-weighting methodology, where revenues from all potential index companies are scanned annually from company 10-Ks or equivalents, and those with at least 50% of gross revenues from water related activities comprise the “direct water exposure” segment, which are then weighted to represent 70% of the total, and those with “indirect water exposure” will be weighted to represent 30% of the index.
Weglarz argued that TBLU may allow access to one of our most essential assets, provide fundamentally driven exposure to the water industry, incorporate all potential beneficiaries in the water value chain, give investors exposure to a rules-based index generation process and deliver liquid access to the water universe.
Financial advisors who are interested in learning more about the water industry can watch the webcast here on demand.