Exploring the Bright Long-Term Investment Outlook for Water

As a commodity, water might not be on par with gold or oil, but it’s a daily necessity. It’s also a prominent part of the global economy. And it is a resource with an increasingly attractive long-term investment thesis.

For many investors, asset allocation in the H2O space can be a tricky endeavor. Enter exchange traded funds such as the Invesco Water Resources ETF (PHO). The $1.93 billion fund follows the NASDAQ OMX US Water Index. It recently turned 18 years old. That indicates it’s battle-tested across a variety of economic environments.

PHO is heavy on industrial stocks. Over the six years ending 2023, the Invesco ETF beat the S&P 500 Industrial Index on an annual basis five times. Some of that advantage derives from the size factor. That’s because PHO currently allocates less than a quarter of its weight to large-cap stocks.

More Favorable Factors for H2O ETF PHO

Of course, past performance isn’t a guarantee of future returns. That means investors considering PHO should examine future prospects for the H20-related investment thesis. Fortunately, government spending in the U.S. and abroad is potentially accretive to that outlook.

“To address these challenges, investment in the industry must increase significantly. The UN estimated in 2020 that an extra USD 260 billion would be needed each year to realise its Sustainable Development Goals by 2030. Some governments directly support the sector: the 2021 US Bipartisan Infrastructure Law included USD 55 billion for improving water-related infrastructure,” noted BNP Paribas.

Adding to the bright outlook for PHO are multiple tailwinds supporting the broader water investment thesis. Those include climate change, growing populations, infrastructure demands, and scarcity, among others.

Additionally, evolving technologies are increasingly H2O-intensive. Water is integral in the production of various forms of semiconductors. And demand for semiconductors is sure to rise thanks to artificial intelligence (AI). Also, water cools high-power servers in data centers. The demand outlook there is potentially beneficial to PHO member firms. That’s because more companies are embracing AI, cloud computing, cybersecurity, and other disruptive technologies.

“Vast volumes of water are used to cool servers and maintain operational temperatures. Making semiconductors is water-intensive,” concluded BNP Paribas. “Potential droughts and water scarcity pose operational risks given the water intensity of processes. Innovative water management solutions including closed-loop systems can play an important role in addressing such sustainability challenges.”

PHO holds 40 stocks with an average market capitalization of $34.10 billion, according to issuer data.

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