Investing in water with ETFs

by , 4th October 2018

Global demand for water is expected to rapidly increase in the next few years as the supply and demand factors surrounding the commodity become increasingly unbalanced.

The World Health Organisation reports that 663m people around the world lack access to safe water. And the United Nations World Development Report for 2018 found that nearly 6 billion people are likely to live in areas that suffer water shortages for at least one month a year by 2050, nearly double the figure today.

This is tied to a growing population and increased water consumption. Cornerstone Capital Group put out a report on water earlier this year that found that if historical trends persist, rising incomes in emerging markets such as China, India, and Brazil will correspond with increased water consumption. The IMF expects emerging markets to grow at an annual rate of 5% for the next four year. A table it published shows that higher GDP is linked to higher water spending (see graph below).

Source: Cornerstone Capital Group

Phil Rolchigo, CTO at Pentair, a water treatment company, was reported earlier this month saying there’s an increasing need to reuse and recycle water in communities. What’s more, existing infrastructure may not be able to cope with the increasing quality and quantity of wastewater.

With this background, it could be a good time to invest in the water sector.

The United Nations World Water Development Report 2018 reports that payment for environmental services schemes and green bonds have been shown to generate interesting returns on investment while lowering the need (and costs) for larger, often more expensive infrastructure.

There are several ways to invest in these water companies through private equity or directly, but access for retail investors to invest in water through an index are slim. Cornerstone comments in its report that when investing in clean tech and renewables ETFs, it is important to know how the underlying companies are screened for exposure and other elements that determine the portfolio.

There are only three water ETFs on the London Stock Exchange.

Lyxor’s World Water UCITS ETF (WATL) has a TER of 0.60% and has been running for nearly four years. Since inception it has seen a steady upward trajectory (see graph below). It tracks the World Water Index CW, which is provided by Societe Generale and calculated by S&P Dow Jones Indices. The index is a market-cap weighted benchmark with a cap at 10% on stock, so it continues to be diversified. It is rebalanced every three months and reviewed every six.

The index includes companies such as water technology company Xylem, and global water treatment company Pentair, which earlier this month showcased its latest technology and solutions at the Water Environment Federations Annual Technical Exhibition (WEFTEC) in New Orleans.

Other companies include Sanitary giant Geberit AG, which works alongside Swiss development organisation Helvetas. Last year it helped construct a water supply line in Nepal.

Source: Bloomberg

The other two ETFs are from iShares. DH2O iShares Global Water UCITS ETF (USD) tracks the S&P Global Water 50 index and costs 0.65% per annum.

The index’s 50 constituents are split evenly between Water Utilities & Infrastructure and Water Equipment & Materials. The ETF was launched in 2007 and has around $570.8m in assets. Since early 2016 it’s been in an upward trajectory, returning around 38% since then. However, in the past year it’s returned -1.87%, not helped by the fact it’s denominated in dollars. Its sterling counterpart, iShares Global Water UCITS ETF (GBP) IH2O has returned 5.26% in the last year, 5.88% in the past three months.

The graph below shows the difference the currency makes.  IH2O is in black and DH2O is in orange.

Source: Bloomberg

Irrespective of the currency though, water can be a good long-view investment for the future as it becomes increasingly important as supply dwindles. It’s a good idea to understand exactly what the ETF is tracking, which companies are included in the index and how they got there.

The chart below lays out the three ETFs available to investors on the LSE.

 

ETF TER 3 Month Rtn Index
Lyxor’s World Water UCITS ETF WATL 0.60% 4.64% SOcGen World Water Index (WOWAX) CW
iShares Global Water UCITS ETF (USD) DH2O 0.65% 3.55% S&P Global Water 50 index
iShares Global Water UCITS ETF (GBP) IH2O 0.65% 5.88% S&P Global Water 50 index

 

ETF Issuers Featured in this Article