Water exchange traded funds are impressing in 2021 and proving remarkably sturdy against the backdrop of recent broader market weakness.
For example, the Invesco Global Water Portfolio (NASDAQ: PIO) is up 21.64% year-to-date and resides just 4.46% below its all-time highs. PIO, which tracks the Nasdaq OMX Global Water Index, is setting a torrid pace as demands for fresh water escalate and scarcity increases. While PIO clearly delivered the goods this year, investors shouldn’t be skeptical of that happening again in 2022.
“Without it, the economy, ecosystems, and society at large can’t survive. That makes access to water a sustainability issue for investors, writ large,” according to Morningstar research. “Water risks, in their various forms, are pressing environmental, social, and governance challenges. Unlike fossil fuels, no alternatives to fresh water exist. As a result, our reliance on water poses not only critical challenges to the health of ecosystems but also to the operations of businesses, communities, and society.”
The $355.3 million PIO, which turns 16 years old next June, is ideally positioned to capitalize on global water investments. While industrial and utilities stocks represent nearly three-quarters of the fund’s sector exposure, there are some nifty surprises, including a combined 15% allocation to healthcare and technology stocks.
PIO also has an environmental, social, and governance (ESG) vibe to it because as water resources and stewardship receive more attention, companies that are clients of PIO components are apt to take water reputational risks more seriously.
“Reputational risks raise the important aspect of stakeholder perceptions on how companies conduct business related to water,” adds Morningstar. “While companies tend to view water more as an economic commodity, water often holds cultural importance to local populations that is directly connected to land use, human rights, or biodiversity. Media scrutiny and the potential for conflict escalating among users over shared freshwater resources can further increase risks for businesses.”
PIO can tap into those themes in various ways. While the Invesco ETF holds just 52 stocks, it’s diverse in terms of geography because it features exposure to stocks from 10 countries, with the U.S. commanding 56.13%.
PIO is also diverse when it comes to market capitalization, as it features exposure to large-, mid-, and small-cap equities, with mid-caps commanding over 58% of the fund’s weight. The bulk of PIO’s holdings are considered blend stocks, so the fund isn’t overly reliant on growth, value, or another single investment factor.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
