We know water is the source of life. But it can also be a source for portfolio diversification. Like gold and oil, water is a commodity—and it happens to be rather scarce nowadays. So, as with any other scarcity, the water shortage creates investment opportunities.

Understanding Water Investments

The investment case for water is simple: water is one of the most important resources, and it is likely to become a lot scarcer. About 70% of the earth's surface is covered in water, but over 97% is saltwater. Saltwater cannot be used for drinking, crop irrigation, or most industrial uses. Of the remaining 3% of the world's water resources, only about 1% is readily available for human consumption.

Rapid industrialization and increasing agricultural use have contributed to worldwide water shortages. Areas that have experienced a lack of H₂O include China, Egypt, India, Israel, Pakistan, Mexico, most of Africa, and the United States (Arizona, New Mexico, California, and West Texas), to name but a few.

Pollution also highlights the need for clean water. The dead zone off the Gulf Coast highlights the impact of fertilizer runoff, and methyl tertiary butyl ether (MTBE), an additive in unleaded gasoline, can be found in well water from California to Maryland.

Overseas, highly publicized incidents in Russia, China, and elsewhere demonstrate that pollution isn't limited to the West. Of course, fouled water supplies further restrict the amount of fresh water available for human use.

Water Investment Indexes

Here are some of the more popular indexes designed to track various water-related investment opportunities:

• The Dow Jones U.S. Water Index is composed of approximately 29 stocks; it is a barometer consisting of many international and domestic companies that are affiliated with the water business and have a minimum market capitalization of $150 million.
• The ISE Clean Edge Water Index was launched in December 2000, and this index represents water distribution, water filtration, flow technology, and other companies specializing in water-related solutions. It contains 35 stocks.
• The S&P 1500 Water Utilities Index is a sub-sector of the Standard & Poor's 1500 Utilities Index; this index comprises just two companies, American States Water (NYSE: AWR) and Aqua America (NYSE: WTR).
• The S&P Global Water Index is an index that began in 2001 that contains 50 companies worldwide; their water-related businesses fall into two areas: water utilities and infrastructure and water equipment and materials.

The MSCI Global Sustainable Water Index provides another look at the water industry from an international perspective. The index focuses on developed and emerging companies that earn at least 50% of their revenue from sustainable water products and services. There are also a variety of utility indexes that include some water stocks.

How to Invest in Water Securities

Firms seeking to profit from water-related businesses include beverage providers, utilities, water treatment/purification firms, and equipment makers, such as those that provide pumps, valves, and desalination units.

A look at the holdings of any of these water indexes provides an easy way to start looking for suitable investment opportunities. Companies from blue-chip stalwart General Electric to small-cap Layne Christensen are all seeking a piece of the water market. In addition to direct stock purchases, some of the larger firms offer dividend reinvestment plans.

When it comes to bottled water, the market is growing internationally. Demand is rising from China to Mexico, following the spike in U.S. consumer demand. Estimates suggest that from 2010 to 2020, American per-capita consumption of bottled water increased 61%–in fact, the average American drinks approximately 45 gallons of bottled water a year. According to a 2018 UN study, 177 countries rely on desalination for at least part of their freshwater consumption needs.

If stock picking doesn't interest you, ETFs, mutual funds, and unit investment trusts (UITs) also provide plenty of opportunities to invest in water. The Invesco Water Resource Portfolio ETF (PHO) is the largest, with a U.S.-centric basket of 38 holdings (as of Feb. 2022) that tilts toward mid- and smaller-cap companies.

The iShares U.S. Utilities ETF (IDU) provides some exposure to water-related stocks. Other alternatives include the Invesco Global Water Portfolio ETF (PIO), which tracks the Nasdaq OMX Global Water Index, and the First Trust ISE Water Index Fund (FIW). Based on popularity, new alternatives are slowly emerging. Benchmarked to the MSCI ACWI Index, the Allianz Global Water Fund invests in improving the supply, quality, and efficiency of water resource management.

The Bottom Line

Recent years have seen an upswing in demand for investments that profit from the need for fresh, clean water. If the trend continues, investors can expect to see a host of new investments that provide exposure to this precious commodity and to the firms that deliver it to the marketplace. There are currently numerous ways to add water exposure to your portfolio; most simply require a bit of research. Opportunities to invest in this scarce resource are flowing freely.