Water ETFs Ready for Their Close-Up | ETF Trends

World Water Day will be observed this Friday. But savvy investors know that water investing is worth considering beyond just one “special” day. Water ETFs help market participants tap into a potential-rich — though often underappreciated — investment theme.

The  Invesco Water Resources ETF (PHO) and the Invesco Global Water ETF (PIO) are two of the leaders in this category. In fact, there are just 11 dedicated water funds of any stripe in the U.S. And those products have a combined $6.3 billion in assets under management. PHO and PIO combine for nearly half that tally.

Water ETFs, such as PHO and PIO, are classified as sustainable funds. That hindered the products in 2023 regarding asset gathering. That’s because various controversies associated with environmental, social and governance (ESG) investing resulted in outflows for sustainable ETFs. However, departures from water ETFs may prove regrettable. because the underlying investment thesis is compelling.

Water ETFs Appropriate Choice for Tactical Investors

The water investment thesis is credible and is underpinned by factors such as rising global populations, increasing demand, and climate change. On the other hand, stock-picking in the space is difficult. And some purported water companies lack the purity necessary for investors to adequately capitalize on the opportunity set. Those are among the reasons PHO and PIO could be useful to tactical investors.

“Because it is difficult to invest directly in water rights or have direct exposure to the price of water, water funds primarily invest in water utilities companies, water transportation companies, companies that produce equipment to treat and/or purify water, and companies that may be considered leaders in water efficiency,” noted Morningstar analyst Mahi Roy.

In an effort to attain purity, some market participants may be inclined to embrace speculative small-cap names claiming to be water plays. PHO allays some of those concerns. That’s because as nearly 56% of its roster is allocated to midcap stocks. Stablemate PIO goes even further: More than 99% of its holdings are large- or midcap stocks.

Both funds are heavy on industrial and utilities. That’s par for the course in the water investing realm. PHO and PIO stack up favorably when measured against large-cap measures of those sectors. Over the past three years, PIO sharply outperformed the S&P 500 Utilities Index, while PHO easily beat that gauge, as well as the comparable industrials benchmark.

“Most water-focused funds invest huge portions of their portfolios in companies that work to ensure the availability and sustainable management of water. On this World Water Day, investors looking for exposure to the reliable supply of safe freshwater should carefully consider these investments as part of a well-diversified portfolio,” concluded Roy.

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