Top Water ETFs for 2020

Learn More About Investing in Water With ETFs

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Investing in water ETFs may sound like a joke at first but water is a commodity that can be traded with ETFs like oil and gold. Although water covers two-thirds of our planet, only a fraction of it is available for drinking for a world population that exceeds 7 billion people. Fortunately, this article can make it easier to invest in the best water funds than it is to find good water.

How Water ETFs Work

Exchange-Traded Funds (ETFs) are investment securities that usually track the performance of an underlying index. 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, less management fees. Since ETFs are passively-managed their expenses are extremely low.  

Investing in Water ETFs

Like other commodity-based ETFs, water ETFs don't invest directly in water. Instead, they typically invest in stocks of companies involved in the water industry, such as businesses involved in water purification processes and products. Water ETFs will often invest in an index of water stocks.

Investing in water carries a special kind of market risk in that 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, meaning the volatility (ups and downs) in price can be more sensitive to smaller amounts of traders buying and selling the stocks.

3 Top Water ETFs

The best way to invest in a narrow segment of the market, such as the water industry, is with an Exchange-Traded Fund (ETF). In fact, water ETFs are the only way for investors to get exposure to dozens of water industry stocks simultaneously in one security.

When searching for the best ETFs, the most important criterion 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 important for obtaining best pricing in the open market.

In our search for water ETFs, we looked for the top funds that track an index of water stocks. Then we reviewed expenses and the performance record.

Here are three of the best water ETFs we researched:

1. Invesco Water Resources ETF (PHO): This water ETF tracks the NASDAQ OMX US Water Index, which consists of 35 water stocks, most of which are mid- to large-size U.S. equities. The companies represented in the fund, according to Invesco, "create products designed to conserve and purify water for homes, businesses and industries." The expense ratio for PHO is 0.62% or $62 for every $10,000 invested.

2. 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. The expense ratio for FIW is 0.55%, which is $55 for every $10,000 you invest.

3. 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. The expense ratio for CGW is 0.61%, which is $61 for every $10,000 you invest.

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. For example, allocating between 5% and 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 a high tolerance for risk (OK with fluctuations in market price).

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. This would represent the largest allocation of your portfolio, such as 30% to 40%. You can then add the satellite holdings, such as sector ETFs, with allocations of 5% to 10% each.