Publications

How to invest in water
- April 1, 2018: Vol. 5, Number 4

How to invest in water

by Benjamin Cole

As an investable commodity, water remains something of an oddity. Unlike oil, wheat, gold or any number of staples, buyers and sellers cannot execute a “bet” on water through well-understood futures markets, such as the New York Mercantile Exchange. There are no global prices for water.

Yet the Organization for Economic Cooperation and Development recently posited the world will need more than $1 trillion annually in water-related infrastructure investment through 2030, and sums will increase from there. The need for projects to deliver and treat water dwarfed all other forms of infrastructure spending combined, including rail, roads, telecommunications and power systems, reported the OECD.

Investors may conclude water has a great future, especially given clean water supplies are shrinking worldwide, and yet global populations are growing. A bet on water, however, takes more positioning than a similar bet on oil.

Beyond that, water is also a worthy proposition for a most portfolios. As a real asset, water and related investments are valued in a different way from broad financial markets, such as bonds or equities as a whole. In brief, water may zig when securities markets zag, thus adding some body to an investor’s holdings.

LISTED SECURITIES

The exchange-traded fund (ETF) remains the perennial friend of the retail investor, providing liquidity and diversity at low fees, and easing into exposure to a wide variety of sectors, including water. A selection of water ETFs is available, though it hardly rivals other sectors, such as precious metals, countries, technology or property.

The Guggenheim S&P Global Water Index ETF, for example is a diverse water ETF that has managed a 10.4 percent year-over-year gain though February 2018, despite getting hit in the global equities sell-off. The ETF offers a 1.70 percent annual dividend. Guggenheim is weighted toward large industrial enterprises and water utilities, with its largest holding being American Water Works Co., a water utility active in 16 states. Guggenheim S&P Global Water has 50 different issues in its pool of water stocks, a big enough universe that if water does well, most likely this Guggenheim ETF also will do well.

The biggest water ETF is PowerShares Water Resources Portfolio, which primarily invests in water conservation and purification plays. The ETF is up 13.6 percent in the 12 months through February. Some of the drawbacks of PowerShares Water include a scant yield of 0.35 percent, perhaps disappointing given the yields available in property ETFs and other sectors. Another shortcoming is PowerShares Water has such a large holding of stocks, its performance more or less mirrors that of the whole equities market, providing little ballast. For the past three years, the fund’s beta is nearly 1.0, indicating it moves with the market. Still, if water and related industries have a good run ahead, investors can certainly gain exposure through this ETF.

The First Trust ISE Water Index Fund targets results that correspond to the price and yield of the equity ISE Clean Edge Water Index. The index is composed of companies that gain a substantial portion of their revenue from the potable and wastewater industries, including utilities. For risk-averse investors, First Trust offers a beta below zero, meaning it undulates less than general market indexes, and has a Sharpe ratio above 1.0, meaning it has delivered more return to risk than market averages. First Trust is up 11.9 percent in the 12 months through February and offers a 1.12 percent yield. For investors who see choppy waters ahead, First Trust may be a good refuge.

THINKING LONG TERM

The Dow Jones U.S. Water Index is a metric comprising 20 water-related stocks, each with a market cap greater than $150 million. The index has steadily gained over the long term, although for the 12 months ended Feb. 28, it was only up 3.8 percent.

Over the past 10 years, however, the index is up 185.7 percent, showing water does have legs. The very long-term oriented can take note the index is up nearly 580 percent over the past 15 years.

While past performance is no guarantee of future results, one assumes the water industry will still be thriving in another 15 years.

A WATER STOCK

Brookfield Infrastructure Partners is a standout in the water-world with a 4.63 percent yield, not earth shaking but better than industry average and a notable tonic for long-term investors. The stock is up 11.3 percent for the year ended Feb. 28, so the combination yield and gain was solid.

Brookfield Infrastructure Partners, with a market cap of $15.63 billion, is a well-regarded international infrastructure operator but is perhaps too diversified for some water investors, with fingers reaching coal transport facilities, natural gas gathering and toll roads, among many other ventures.

Brookfield owns Boston-based Poseidon Water, a developer of water-treatment projects, and Australian water utility Flow Systems. Moreover, management recently noted “developing nations require the buildout of new projects to provide access to safe water for drinking and agricultural uses. At the same time, developed countries face issues with aging and ineffective infrastructure, and the declining quality of existing water resources.” Accordingly, Brookfield plans to focus on water supply, transportation and recycling, going forward.

For patient investors, Brookfield is interesting. The company appears able to raise its dividend going forward, meaning shareholders could get “paid to wait” as Brookfield migrates into the huge water trade, where perhaps its savvy will provide investors with even better payoffs.

The Summit Water Infrastructure Multifactor ETF could be an option for those seeking diversity in the water infrastructure space. This is a small ETF, with net assets of $6.5 million as of early March. But the diminutive fund has spread its pool of cash among many water infrastructure holdings and appears ready to ride the tide in or with the sector.

CLOSING THOUGHTS

For patient investors, listed water-related investments have proven their worth in recent decades, and may offer steadier returns should broader equities markets face a weak year or two. Water is not the next dot-com or cryptocurrency, and large short-term gains (or losses) are likely not on the agenda.

But the world will always need water, especially clean water, and some investors should consider exposure to water as a long-term position in their portfolios.

 

Benjamin Cole (7continents7@gmail.com) is a freelance writer based in Thailand.

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