The Water Resources ETF is a type of investment instrument that invests capital in stocks related to water resource companies. An ETF stands for exchange-traded fund and can be bought or sold on stock exchanges. A Water Resources ETF will target investment into companies that play a major role in the water resources sector. Xylem, which primarily provides water treatment and transportation equipment, became a $5.6 billion company in 2023; global water market leader Veolia Environnement saw total revenues of over €30 billion for the same year.
How Water Resources ETFs Operate
Specific Water Resources ETFs each choose a benchmark index to follow, such as the Invesco Water Resources ETF (PHO), which tracks the Nasdaq OMX US Water Index. This index consists of 50 large US companies associated with water resources. The ETF management company then purchases stocks based on the composition of this benchmark index, building a portfolio that mirrors that of the respective index. To illustrate, the top 10 holdings in PHO compose around 58% of all fund assets and include companies such as American Water Works, Xylem, and Roper Technologies.
The organization that manages the ETF tracks this benchmark index continuously and adjusts its constitution according to market fluctuations. For example, in 2023, global usage of water resources increased, leading to a rise in water treatment technology stocks. The ETF management company increased its holdings in these companies accordingly. Additionally, the index added two water companies with market caps exceeding $5 billion in Q4 2023, ensuring that the ETF remained well-diversified and had a long-term portfolio.
Advantages of Water Resources ETFs
Costs are a large part of what makes Water Resources ETFs so liquid. Actively managed funds typically have expense ratios that range between 1.5% and 2%, nearly two to four times higher than PHO’s 0.60%. PHO’s average daily trading volume was 500,000 shares in 2023, providing high liquidity and allowing investors to invest and make adjustments as needed.
Water Resources ETFs, through investment in a basket of stocks related to water resources, can effectively negate stock-specific risks. This means that the poor performance of a particular company will not have much impact on overall ETF performance. For instance, while shares of Veolia Environnement struggled in the European market and weighed down PHO’s performance during Q2 2023, this was offset by Pentair and Roper Technologies, which helped overall PHO results remain stable.
Investment Value of Water Resources ETFs
Human survival and development depend on water resources. Water Resources ETFs provide economic advantages and also help in the proper management and conservation of water resources. For example, if you buy PHO, some of the proceeds go to improve global water quality and reduce energy needs for pumping. These activities open up long-term opportunities for businesses such as Xylem (XYL) and Veolia Environnement (VE). Veolia Environnement carried out 9.5 billion cubic meters of water treatment and distribution operations in 2023, improving the quality of life for millions of people around the world.
The water resources sector is anticipated to grow as global focus on the management and conservation of this resource remains heightened. The global water treatment market is estimated to grow at a CAGR of 6.5%, from $283 billion in 2023 to $386 billion by the end of the assessment period, according to a research report by Mordor Intelligence.
The annual average return in the last three years of PHO was 8.5%, which exceeded the S&P 500 index’s average annual return of approximately 7%, showing promising growth prospects in the water resources field. FactSet reported that the water sector experienced an aggregate annual growth rate of 10% in 2023, driven by strong performance among water treatment and irrigation technology companies.
