Is investing in water a good idea? Can we expect below average, average, or exceptional results in the future? How has water performed in the past, and what are the best ways to invest in water?
Why is everybody talking about water all of a sudden? At the end of the movie Big Short, the narrator says that Michael Burry now mainly invests in “Water.” If you haven’t seen the movie or don’t know who Michael Burry is, he is a value investor who shorted the housing market before the crash of 2008. As you can imagine, he made a lot of people a lot of money, including himself. So what exactly did he mean when he said “Water”.
Burry invests in water-rich farmland and foods that require a lot of water to produce. This is what he said on the subject:
What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce — the water embedded in food is what I found interesting.
Okay, but we are not Michael Burry; what can we invest in to put our money to good use, have a positive impact, and make a good return at the same time?
The easiest way to start is with the use of Exchange Traded Funds that specifically invest in water-focused assets or companies.
S&P Global Water Index ETFs
The S&P Global Water Index provides liquid and tradable exposure to 50 companies from around the world that are involved in water-related businesses. To create diversified exposure across the global water market, the 50 constituents are distributed equally between two distinct clusters of water-related businesses: Water Utilities & Infrastructure and Water Equipment & Materials.
iShares Global Water Index ETF – CWW
The biggest ETF comes from iShares. Here is the hypothetical return of a $10,000 investment into CWW compared to S&P500 ETF – SPY.
Over the period from December 2007 until August 2021, CWW showed incredible returns with CAGR of 10.03% compared to SPY’s 10.79%.
What companies are we actually buying with CWW?
The ETF is quite top-heavy, with 52% of the ETF allocated to Top 10 holdings.
American Water Works (AWK) represents over 10% of the fund. So if you are thinking about buying this water ETF, it would be a good idea to briefly understand the company and whether it is a good investment today.
AWK has demonstrated steady growth & returns over the last 10 years.
AWK’s performance significantly outpaced S&P500 ETF – SPY over the period as well.
Is AWK a good buy today?
Historical performance is impressive but is the company a good buy today? The company is currently trading at price levels that make it many times higher than the Utilities sector median.
Utilities sector P/E ratio, for example, for this year is estimated to be around 28 (Utilities Snapshot – Fidelity) compared to AWK’s 44. Same goes for every other fundamental metric.
So relative to the industry, AWK is expensive.
What are analysts saying?
Out of 18 Wall Street analysts that follow the company, 11 are Neutral on the stock, meaning they think that if you already own it, hold it. If you don’t, don’t buy it. That said, 6 analysts remain Bullish and Very Bullish on the stock.
Analyst consensus on earnings is that earnings will grow for the rest of 2021 and fall in the beginning of 2022.
The company projects long-term earnings growth of 7-10%. Yes, the company is expensive today but looking at the future, it still remains a solid investment.
Invesco Water Resources ETF – PHO
The investment seeks to track the investment results (before fees and expenses) of the NASDAQ OMX US Water IndexSM (the “underlying index”). The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index. The underlying index seeks to track the performance of companies that create products designed to conserve and purify water for homes, businesses and industries.
PHO vs CWW vs SPY
Let’s compare historical performance of this ETF to iShares Water ETF – CWW and S&P 500 ETF – SPY.
Invesco PHO CAGR over the period: 8.28%
iShares CWW CAGR over the period: 10.03%
S&P500 SPY CAGR over the period: 10.79%
PHO’s is a bit more volatile with annualized standard deviation of 19.76% compared to SPY and CWW at around 15%.
PHO is also top-heavy with Top 10 holding representing 58% of the portfolio. There is some overlap between the top 10 of CWW and PHO, including AWK, XYL, PNR. Overall holdings are similar as well which makes sense. There is only so many companies focusing on water.
Expense Ratios & Dividend Yield
CWW and PHO have almost the same expense ratio.
At the time of writing, CWW has a better dividend yield of 1.14% compared to PHO of 0.27%. So if you are interested in dividend income, CWW is a better choice.
First Trust Water ETF (FIW)
The investment seeks investment results that correspond generally to the price and yield (before the fund’s fees and expenses) of an equity index called the ISE Clean Edge Water Index. The fund will normally invest at least 90% of its net assets (including investment borrowings) in the common stocks and depositary receipts that comprise the index. The index is designed to track the performance of small, mid and large capitalization companies that derive a substantial portion of their revenues from the potable water and wastewater industry, according to Clean Edge.
Let’s compare FIW to the other mentioned ETFs as well as SPY.
FIW has quite significantly outperformed other water ETFs I mentioned. With CAGR of 11.65% it is the best performing water ETF on the list.
There is some overlap in the top 10 holdings with CWW and PHO but FIW is less focused on certain companies.
FIW Expense Ratio is lower at 0.54%. However, the dividend yield at current prices is also lower at 0.43%.
Although most of the ETFs on the list are expensive in terms of P/E ratio, they offer great growth potential unfortunately due to tragedies in some regions of the world and lack of water.
Another investment opportunity that gets talked about quite a lot is almonds. Perhaps because Michael Burry mentioned almonds in an interview as well.
Fact is, to produce one almond it takes 1 to 3 gallons of water or around 19 to 57 cups.
Here is a look at US Almonds Price Received per pound of Almonds. Price today is significantly lower than it was in 2015 when the price per pound spiked at $4/lb.
According to the Bureau of Labor Statistics, the peak in Almond prices is attributed to increased demand from Asia and harsh growing conditions that resulted in lower supply.
The trend reversed in 2015.
The factors that contributed to the rise in export nut prices, such as strengthening Asian economics and poor weather conditions, now reversed and led to the fall in prices that began after June 2015.
The changes in Asian economies, domestic consumer preference, and growing conditions that once strongly influenced nut prices finally found a relative equilibrium. After the continuous declines ended in April 2016, nut prices slightly rose and held fairly steady for the remainder of the year
No direct investments in Almond producers
Unfortunately for us, there is no direct way to invest in Almond producers. Most producers remain private companies. Although some like Blue Diamond Growers do offer investment certificates, those require some work to purchase and are also restricted. Publicly traded companies like Treehouse Foods (THS), as an example, do not purely focus on Almonds.
Same goes for agricultural ETFs, none will be pure enough to focus specifically on one crop.
Risks of investing in water
Every investment obviously carries risk. But investing in these companies specifically has additional risks on top of our typical investment risks.
- Reliance on government funding
Utilities and many companies within these ETF’s portfolios are reliant on government funds to some extent. With COVID and a myriad of other issues that governments around the world are facing, funding for these projects can be diverted somewhere else.
However, at the same time, in most cases, water is likely to take precedence over other spending because of its importance for survival.
2. Changing weather patterns
It is unfortunate that to some extent, growth % of these companies depends on how bad the situation with water is around the world. This is not to say that if droughts completely go away next year, these companies will not grow. No, but the growth might be slower.
Is investing in water a good idea?
Yes, there is a good selection of ETFs that invest in the sector that showed remarkable historical performance. So not only is it a great investment from a returns perspective, but investing in these companies will potentially help mitigate the effects that various external forces have on water security across the globe.
CWW.TO Fact Sheet – https://www.blackrock.com/ca/investors/en/literature/fact-sheet/cww-ishares-global-water-index-etf-fund-fact-sheet-en-ca.pdf
PHO Fact Sheet – https://www.invesco.com/us-rest/contentdetail?contentId=d15407c649400410VgnVCM10000046f1bf0aRCRD&dnsName=us
FIW Fact Sheet – https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=0e8cc1bc-806a-4daa-bbd0-0cdfe4d528d5