U.S. Midwest Drought Emphasizes Importance of Water Resources

A severe drought has been racking the U.S. Midwest, something not seen in over 10 years. On the flip side, it does spell opportunities for investors as the importance of water resources comes to the forefront.

“The worst U.S. Midwest drought since 2012 expanded over the past week despite mild temperatures as a lack of rain across the heart of the American farm belt threatened newly seeded corn and soybean crops, climatologists said in a weekly report,” a Reuters report said.

According to the report, a combination of below-average rainfall and high winds has been the primary culprit. As a result, a lackluster summer crop season and harvest shortfalls could be the unfortunate byproduct of the drought conditions.

“Much of the (Midwest) region did not see appreciable rainfall. As a result, short-term dryness continued to worsen, leading to widespread deterioration,” climatologists said in the weekly report, as noted by Reuters.

Given these harsh conditions, the need for water resources becomes amplified. As mentioned, this opens opportunities for niche exchange traded funds (ETFs) like the Invesco Water Resources ETF (PHO).

Niche, but Well-Diversified

Niche funds may present the potential issue of being over-concentrated in a few holdings, but PHO spreads its allocation over 40 stocks (as of July 11). The largest allocation is 8.25%, which is water treatment technology company Ecolab Inc.

In terms of its market cap and style allocation, almost 50% of the fund consists of a mid-cap blend. Getting mid-cap exposure provides investors with the perfect blend of large-cap stability, while also attaining growth exposure that small-cap stocks can provide.

Per its generalized fund description, PHO is based on the NASDAQ OMX US Water Index. This index contains public companies within the water industry that focus on areas such as water utilities, machinery, life sciences tools and services, and many others.

From a macro perspective, water resources is an industry that can thrive in various economic conditions due to its ongoing need. This isn’t an isolated issue to just the drought in the Midwest. In fact, estimates by the World Economic Forum have concluded that more than $26 trillion will be spent on water provisions by 2030, reflecting the urgency of water scarcity and the growing need to find water solutions in a warming world.

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