Water is one of the most sought after and used resources on the planet. Like other commodities like oil and gold, water assets can add significant diversification to any portfolio.
One way to get in touch with the water industry is through water exchange traded fund (ETF). These ETFs invest in companies involved in water treatment and purification as well as water distribution. Some notable names include Germany’s BASF SE ( BAS.DE ), 3M Co. (MMM) and ITT Inc. (ITT).
As an underlying commodity, water ETFs are often used as a defensive position in a portfolio. However, as water scarcity becomes a growing threat, these ETFs can also be a significant offensive play.
Compared to other types of ETFs, it is water ETFs the universe is small, consisting of five funds that trade in the United States, with the exception of inverse and leverage effect ETFs, as well as ETFs with less than $50 million in assets. These ETFs do not invest in water as a commodity or in water rights. Instead, they focus on companies involved in water resources, infrastructure, utilities and related industries. Water ETFs underperformed the S&P 500 Index, which posted an annual total return of -12.2% as of September 2, 2022. The best performing water ETF based on past year performance is the First Trust Water ETF (FIW)
We examine three of the best water ETFs below. All numbers below are as of September 6, 2022. In order to focus on the Funds’ investment strategy, the best holdings listed for each ETF exclude cash holdings and holdings purchased with the proceeds of securities lending, except in unusual cases such as an exceptionally large portion of cash.
- Water exchange-traded funds (ETFs) have underperformed the broader market over the past year.
- The water ETFs with the best annual total returns are FIW, PHO and CGW.
- The top holders of these ETFs are IDEX Corp., Xylem Inc. and American Water Works Company Inc.
- Total return in one year: -14.7%
- Expense ratio: 0.53%
- Annual dividend yield: 0.39%
- Three-month average daily volume: 56,444
- Assets under management: $1,214.8 million
- Start date: May 8, 2007
- Issuing company: First Trust
FIW is a multi-cap ETF that invests in a mix of value and growth stocks. Tracks the ISE Clean Edge Water Index. The index is comprised of publicly traded companies that derive a substantial portion of their revenue from the drinking water and wastewater industry. They are chosen according to Market capitalization, liquidityand other requirements. More than 86% of the portfolio is divided into three sectors: industry, utilities and healthcare.
The first three FIW holdings are IDEX Corp. (IEX), a water treatment and infrastructure company; Essential Utilities Inc. (WTRG), an infrastructure company and service provider in the fields of water, wastewater and natural gas; and Xylem Inc. (XYL), provider of water management technologies, products and services.
- Total return in one year: -16.6%
- Expense ratio: 0.59%
- Annual dividend yield: 0.23%
- Three-month average daily volume: 99,520
- Assets under management: $1.7 billion
- Start date: 06 December 2005
- Publishing company: Invesco
PHO targets the NASDAQ OMX US Water Index. The benchmark is comprised of US-listed companies that manufacture water purification and conservation products for businesses and households.
More than half of the stocks in the ETF’s portfolio are engineering and water companies, with the remaining holdings in life sciences tools and services, building products, software and chemicals, among others. PHO is a multi-cap fund that owns a mix of value and growth companies.
The top three PHO holdings include Xylem Inc., Danaher Corp. (DHR), which produces devices and water purification technologies for municipal and wastewater treatment plants; and Ecolab Inc. (ECL), which provides products and services for water management, hygiene and infection prevention.
- Total return in one year: -23.7%
- Expense ratio: 0.57%
- Annual dividend yield: 1.10%
- Three-month average daily volume: 60,094
- Assets under management: $928.7 million
- Start date: May 14, 2007
- Publishing company: Invesco
CGW is a multi-cap mixed fund that tracks the S&P Global Water Index. The index consists of a portfolio of companies from developed markets representing water services, infrastructure, equipment, tools and materials. Over 89% of CGW’s portfolio is allocated to industrials and utilities.
Among CGW’s three largest holdings are American Water Works Company Inc. (AWK), commercial and residential provider of water and wastewater services; Xylem Inc.; and basic services.
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