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ETF-INVESTMENT

Investing in the "blue gold"

The effects of climate change have long since been felt in Europe, too, in the form of forest fires and droughts. Water is becoming an increasingly important resource, and investment in water supply infrastructure is becoming ever more urgent.


Two thirds of the earth's surface is covered with water. So there should be enough water for everyone. Unfortunately not! Only 2.5% of the available water in the world is fresh water and edible for humans.


Water consumption is currently increasing at such a rate that water supply problems will increase significantly. By 2050, consumption is expected to increase by 55%.


And the situation is already dramatic today. According to the UN World Water Report, over 60% of the world's population suffers from water shortages for at least one month a year.


One of the reasons for this is that in many places the infrastructure for water treatment, supply and disposal is not in good condition or does not exist at all. Current spending on water infrastructure is around 40 billion U.S. dollars a year. However, according to experts, 200 billion U.S. dollars are needed annually!


How can we as investors get into the "blue gold" business?


For one thing, we can invest in traditional utility companies. These companies supply households and industry with water and are responsible for the disposal and treatment of wastewater.


These include, for example, the largest water utility in the USA: American Water Works. With over 7,000 employees and 14 million customers, the group is a giant in the water business. The company's financials are very solid, and its share price has risen more than 800% since it went public in 2008.


Traditional utilities can add stability to a portfolio and provide a crisis-proof, reliable source of dividends.


In addition to utilities, we investors can invest in suppliers and service providers in the industry. These are, for example, construction companies that build or modernize relevant infrastructure.


Xylem provides analytical instruments, pumping systems, regulators and other water and wastewater technologies. The company is also based in the U.S., but operates globally.


Xylem is also trying to tackle the problem of microplastics and is developing increasingly promising high-tech solutions to do so.


As a rule, companies in the water sector grow rather slowly, but are often reliable dividend payers. A broadly diversified portfolio can certainly benefit from companies in the sector.


However, care should be taken to ensure that there is also broad diversification within the sector. It is advisable to diversify across different markets and sectors to reduce risk.

The best way to do that is to use an ETF that does the diversification for you. Let's take a look at 3 of the biggest in the field:

The iShares Global Water ETF is the largest in the field, with well over €1.5 billion in volume, and is heavily traded, as you can see here in Community Insights.

The ETF represents 50 of the largest companies whose activities are in the water sector. The companies are distributed globally, but about half are in the USA. The two largest positions are the just presented corporations American Water Works and Xylem.


Last year, the ETF was slightly in the red, as the Corona slump could not be recovered, but this year the losses have been recovered significantly and over the year is now a plus of over 30%.

The Lyxor World Water ETF manages around 920 million euros. The largest positions here also include American Water Works and Xylem, but the number 1 is Geberit AG. This is a Swiss company known for its sanitary products.

The fund volume of the L&G Clean Water ETF is currently only about 100 million euros, but it is also only tradable since July 2019.


The composition of this ETF differs from the previously mentioned, as the 66 positions are all roughly equally weighted. In addition, fewer large caps are included, but many small and medium-sized companies - mostly from the USA.

A look into the future 🔮


As the world's population grows, demand for water will also increase in the future. However, availability is simultaneously decreasing from year to year as a result of climate change.


The infrastructure for the sector will therefore have to be further expanded and modernized in the coming years in order to secure the global water supply.