Water Investing: A Compelling Long-Term Trajectory | ETF Trends

Drought conditions across the western US serve as reminders that climate change is having a severe impact on water supplies and substantial investments are needed to ensure that supplies don’t dwindle further.

Talk that the US water scenario is growing dire is sparking 2021 upside for exchange traded funds such as the Invesco Water Resources ETF (PHO). PHO, which tracks the NASDAQ OMX US Water Index, is up 19% year-to-date. That includes a recent selloff that’s seen the fund shed 7% over the past month, but that could prove to be a buying opportunity. A variety of factors confirm that water stocks and PHO could be appropriate assets for patient investors.

“Fresh surface water resources that humans can easily access, such as rivers and lakes, only constitute about 22,300 cubic miles, about 1/150th of one percent of the total water on Earth. Water, although ubiquitous, is a non-renewable, irreplaceable resource,” notes Nasdaq Investment Intelligence.

While some investors may view water ETFs as no more than seasoned versions of thematic funds, the reality is that with right structure and methodology, water ETFs can be compelling industry-level additions to portfolios.

PHO checks those boxes. The Invesco fund is home to 39 stocks, which is a fairly deep bench for a focused fund of this nature. Additionally, the fund features exposure to more than a dozen industry groups, providing investors with exceptional depth to the water investment ecosystem. PHO’s depth is all the more relevant at a time when water resources are becoming more scarce.

“The scarcity in accessible fresh water is becoming a more severe threat to the prosperity and sustainability of all human societies. Currently, 40% of the world’s population lives in water-stressed areas. The number is expected to increase to 50% by 2025, with 1.8 billion people living with absolute water scarcity,” according to Nasdaq.

That scarcity is coming against the dual backdrop of climate change and a rising global population that’s expected to hit 9.9 billion in 2050. That’s likely to bring elevated water stress, underscoring the need for global governments to be proactive on water spending.

For its part, PHO is a heavily domestic fund, and that’s a plus because local water entities have access to capital, and Congress appears to be finally waking up to the idea that water spending needs to increase right away.

“To address some of these challenges, President Biden proposed an ambitious infrastructure plan which includes an unprecedented $111 billion to upgrade U.S. water infrastructure. These include: $45 billion to replace all lead pipes and service lines; $56 billion to modernize aging drinking water, storm water, and wastewater systems; $10 billion to monitor and remediate PFAS chemicals in drinking water and upgrade small rural and household water systems; and $5 billion to store water in Western states,” concludes Nasdaq.

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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.