Top Water ETFs for 2020
Learn More About Investing in Water With ETFs
Water is a commodity that can be traded like oil and gold, and exchange-traded funds (ETFs)—which group assets and commodities together in a bundle and tracks the performance of an underlying index—are the easiest way to invest in companies in the water industry. Whether it's renewing and replacing aging infrastructure, conserving, purifying, bottling, or transporting water, many companies are involved in this often-overlooked industry.
Investing in Water ETFs
Most ETFs are passively-managed, which makes them similar to index mutual funds. For example, the SPDR S&P 500 Index ETF (SPY), invests in such a way that the performance mirrors that of the S&P 500 index, which includes the 500 largest American companies. Since ETFs are passively-managed, their expenses are extremely low. Like other commodity-based ETFs, water ETFs don't invest directly in water. Instead, they invest in stocks of companies involved in the water industry, such as businesses involved in water purification processes and products.
Investing in water carries a special kind of market risk because it's not a widely studied area of the market like large-cap U.S. stocks. This relative obscurity can create market volatility because water stocks tend to be thinly traded, and the volatility in price can be more sensitive to smaller amounts of traders buying and selling the stocks. If you're unfamiliar with the water industry and some of the problems they face, the American Water Works Association releases a yearly State of the Water Industry Report that sums up the sector and its future outlook. Reading the main points can help you decide if it's an industry you want to consider investing in.
Top Water ETFs
Water ETFs are generally the only way for investors to get exposure to dozens of water industry stocks simultaneously in one security. When searching for the best ETFs, one of the most important things to look for is a low expense ratio.
Since most ETFs passively track a benchmark index, the holdings are often similar within a given category. Therefore, a low expense ratio often has a high correlation to superior performance.
It's also important for an ETF to have at least a three-year performance record with assets higher than average for the category. This provides a performance history to review and some assurance that the fund is relatively liquid, which is vital for obtaining the best pricing in the open market. Here are three of the top water ETFs for 2020:
Invesco Water Resources ETF (PHO)
This water ETF tracks the NASDAQ OMX US Water Index, which consists of 34 water stocks, most of which are mid- to large-size U.S. equities. The companies represented in the fund create products designed to conserve and purify water for homes, businesses, and industries listed on the U.S. exchange. Its expense ratio is 0.60%, or $60 for every $10,000 invested.
First Trust ISE Water Index ETF (FIW)
This ETF from First Trust tracks the ISE Clean Edge Water Index, which is a modified market capitalization-weighted index of the top 36 listed companies working with both potable and wastewater industry. Its expense ratio is 0.55%, or $55 for every $10,000 invested.
Invesco S&P Global Water Index ETF (CGW)
This ETF from Invesco tracks the S&P Global Water Index, which consists of approximately 50 water stocks, most of which are mid-capitalization. The regional allocation is split nearly evenly between the U.S. and non-U.S. stocks. Its expense ratio: 0.62%, or $62 for every $10,000 invested.
The Bottom Line
Investing in water ETFs is similar to investing in other specialized funds, which means that investors should not allocate a large percentage of their portfolio to one fund, especially if it is a sector fund that concentrates on one area of the market. Allocating between 5–10% of a portfolio to one sector is sufficient for diversification and minimizing market risk.
Above all, investors should choose investments that align with their investment objectives and risk tolerance. For example, stock ETFs are appropriate for investors with a long-term time horizon (10 years or more) and high risk tolerance. If you are building a portfolio of ETFs, a good way to begin is with a core holding that invests in a broad index, such as the S&P 500. From there, you can then add the satellite holdings, such as sector ETFs.
U.S. News. "SPDR S&P 500 Index ETF." Accessed March 20, 2020.
American Water Works Association. "2019 State of the Water Industry Report," Page 1. Accessed March 20, 2020
Yahoo! Finance. "Invesco Water Resources ETF (PHO)." Accessed March 20, 2020.
Yahoo! Finance. "First Trust Water ETF (FIW)." Accessed March 20, 2020.
Invesco. "CGW - Invesco S&P Global Water Index ETF." Accessed March 20, 2020.