Shrinking Water Supply, Growing Water Trade: Consider These Investing Tributaries

Water is a fixed and precious resource—it only seems like we’re up to our ears in it. The water “trade” is growing rapidly amid recent catastrophic environmental events such as wildfires, floods and hurricanes; drinking water contamination from old lead pipes; and growing attention on climate change. New Biden administration policy proposals include efforts aimed at providing cleaner drinking water and addressing water scarcity.

Much like oil and gold, water can be viewed as a tradable commodity or asset with potential investing opportunities, said Michael Kealy, education coach at TD Ameritrade. Familiar publicly traded companies, as well as smaller, more under-the-radar businesses are ramping up in water, and the industry overall bears watching, Kealy noted.

“Water is a dwindling resource, but everyone needs it, and it’s entirely necessary for the global economy,” Kealy said. “While water may not be always be in the limelight or considered a ‘core portfolio allocation,’ there are expanding numbers of ways to look at water from an investor’s standpoint. Water may also present opportunities to diversify globally.”

Here are a few pointers on investing in water.

How Big Is the Water Industry and Why Is the Water Industry Growing?

The global water and wastewater treatment equipment market was valued at nearly $62 billion in 2020 and is expected to grow 4% o year through 2028, according to a March 2021 report by Grand View Research.

Factors driving water market growth include rapid urbanization and industrialization, diminishing freshwater resources, rising environmental concerns, and increasingly stringent government regulations, the report stated.

“Rapid urbanization, technological advancements, infrastructural development, and population growth have increased the demand for fresh and processed water across the globe,” the Grand View report stated. The report also pointed out that amid limited availability of freshwater resources, there’s “a growing focus on wastewater treatment and reuse to meet the rising demand.”

What Does President Biden’s Infrastructure Plan Mean for Water?

President Biden’s proposed $2 trillion infrastructure plan, announced March 2021, includes $111 billion to eliminate lead pipes from the U.S. water supply and otherwise “upgrade and modernize America’s drinking water, wastewater, and stormwater systems, tackle new contaminants, and support clean water infrastructure across rural America,” a White House report stated. “Aging water systems threaten public health in thousands of communities nationwide.”

In addition to reducing lead exposure in homes, Biden’s plan also aims to reduce lead exposure in 400,000 schools and childcare facilities. “No American family should still be receiving drinking water through lead pipes and service lines,” the report stated.

What Are Some Examples of Publicly Traded Companies in the Water Industry?

Many different companies are involved in some form or sector of the water industry and water investments: manufacturers of pipes, pumps, filters, and valves; makers of chemicals used to treat wastewater; or utilities providing water to homes and businesses. Many of these companies are poised to serve cities and other municipalities scaling up efforts to upgrade water infrastructure.

Company examples include Ecolab Inc. (ECL), whose Nalco Water unit is a leading provider of water treatment and process improvements, and Evoqua Water Technologies (AQUA), which serves industrial, municipal, and recreational customers.

Other examples include American Water Works (AWK), Danaher Corp. (DHR), Global Water Resources (GWRS), and Xylem Inc. (XYL), along with DuPont (DD), whose offerings include “membrane science and ion exchange solutions” to make drinking water cleaner.

“Many companies involved in the water industry have global business operations, and they see water as a key part and growth driver of their overall business,” Kealy explained. “For investors, that means there may be opportunities to diversify portfolios globally.”

How Else Can Investors Follow the Water Trade?

Water could be considered an “alternative” asset class in the vein of commodities. Several exchange-traded funds (ETFs) are linked to water, and there’s also the S&P Global Water Index ($SPGTAQUA), which tracks shares of 50 companies with water-related businesses, including equipment and materials as well as utilities and other infrastructure (see figure 1).

Futures exchanges also see potential opportunities in water. In 2020, CME Group (CME) launched a futures contract based on the Nasdaq Veles California Water Index, which tracks the price of water rights across the five largest and most actively traded regions in California’s surface water market.

“Water scarcity presents a growing risk for businesses and communities around the world, and particularly for the $1.1 billion California water market,” Chicago-based CME announced last year in a statement about the new contract.

Overall, the rapidly growing water industry is still in its early stages with many relatively new entrants angling for a piece of the market, as opposed to more “mature” industries. That means it’s important for investors considering water-related opportunities to try to look several years ahead, according to Kealy.

Water is a “long-term theme,” he added. “It’s not an investing opportunity to jump in and out of based on one or two earnings releases. Water is going to be in tremendous demand, and it’s becoming much more important to not waste water and utilize water resources in intelligent ways. The businesses and economies that have the capability to treat water properly can both make money and help society.”

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.