Water as an Investment: Opportunities for Investors in the Growing Market

The increasing drought in many parts of the world has heightened awareness of the scarcity of the precious resource, water. Although much of the Earth is covered by water, less than three percent of it is drinkable. Furthermore, this resource is unevenly distributed, leading to inadequate water supply in many southern countries. The United Nations (UN) has recognized the need for action to improve water supply and meet the growing demand in the face of climate change.

This presents interesting opportunities for investors. One option to profit from the water theme is to invest in specific stocks, funds, or ETFs that focus on companies offering solutions for more efficient water usage. Andreas Fruschki of Allianz Global Investors explains that their approach addresses water scarcity through three solution pathways: water supply, enhancing water usage efficiency, and water quality.

The Allianz Global Water Fund, managed by Fruschki, does not directly invest in water as a commodity but rather in companies developing technologies and services for more efficient water usage. This includes companies in areas such as water storage, water network operation, irrigation equipment, and water treatment. Efficient water management is considered a key theme here.

An example of a company the fund invests in is Veolia Environnement, a French conglomerate that is a global leader in water and waste services. Veolia Water, a subsidiary of Veolia, builds drinking water treatment plants and seawater desalination plants in various parts of the world. In the first half of 2023, Veolia reported a 14 percent increase in revenue to 22.75 billion euros and a net profit of 662 million euros, with over 40 percent of the revenue coming from Veolia Water.

In the United States, American Water Works is the largest water supply company and a popular choice for water funds. The company serves 3.4 million customers in 24 states, including households, industrial companies, and government facilities. It is involved in drinking water and wastewater treatment as well as the operation of water facilities and pipelines. American Water is subject to state regulation when determining water supply rates. In the third quarter of 2023, the company reported an approximately eight percent increase in revenue to 1.17 billion US dollars and a net profit increase to 323 million US dollars.

For investors looking to diversify broadly in the water sector, the iShares Global Water ETF is a suitable option. It tracks the S&P Global Water Index and provides investors access to the 50 largest publicly traded companies worldwide engaged in water supply and treatment. Companies in the index include not only Veolia Environnement and American Water Works but also Xylem, a leading manufacturer of water treatment equipment. The ETF has a total expense ratio (TER) of 0.65 percent per year and pays dividends semi-annually. With a broad portfolio, it offers a diversified way to invest in the water market.

Given the increasing demand for clean water and efforts to improve water supply, investments in the water sector could offer attractive long-term returns. However, investors should always consider their individual financial goals and risk tolerance before choosing a specific investment strategy.