The Invesco Water Resources ETF (PHO) has been a sneaky good industry exchange traded fund in 2021, and some market observers believe that this trend could continue next year.

Up 25.45% year-to-date, PHO is handily beating the largest traditional industrial and utilities ETFs — relevant comparisons because water ETFs are usually heavily allocated to those two sectors. PHO follows the NASDAQ OMX US Water Index.

That benchmark “seeks to track the performance of US exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries,” according to Invesco.

Those are meaningful traits at a time when more investors are awakening to the importance of water and more companies and governments are finally getting hip to the fact that water scarcity is a real issue that needs to be immediately addressed.

“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.”

Investors are awakening to the water investment opportunity set. Year-to-date, market participants added $413.5 million in new capital to PHO — a healthy percentage of its $2.11 billion in assets under management.

PHO is also relevant from the perspectives of sustainability and environmental, social, and governance (ESG) investing because water risk is a very real one that corporations are just starting to acknowledge.

“Despite the paramount importance of water, the risks that scarcity or poor quality pose to economies and individual businesses have received less attention from investors than they deserve when compared with carbon,” adds Morningstar.

This implies that the water investment thesis is expansive and will remain that way well into the future. PHO taps into that theme with 38 stocks spread across 10 industry groups. The average market capitalization of PHO components is $35 billion, but the fund isn’t dependent on large-cap equities as a primary drive of returns. In fact, the size factor could work in PHO’s favor in 2022, as the fund devotes about 76% of its weight to mid- and small-cap fare.

Over the past three years, PHO is up 108.3%, or more than the combined returns of the largest industrial and utilities ETFs.

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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.

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