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In an interesting bit of irony, this article is being penned from Southern California, where it hasn't rained in months. Believe it or not, that's actually a complaint.
To the north, some vineyard owners are resorting to water witching – an ancient practice with essentially no empirical scientific support. That underscores the level of desperation for water. To the east in Nevada, water levels in Lake Mead and at the adjacent Hoover Dam are at historically low levels.
Looked at another way, all these sunny days in the West are no longer a gift. They're a curse because some areas are resorting to water rationing and that ominous scenario is just getting started. Before getting into too much doom and gloom, there's silver lining for investors here. That being water equities and the related exchange traded funds are soaring.
Now more 14 or 15 years old in some cases, the oldest water ETFs can be seen as among the original iterations of thematic ETFs, but that status has long since been shed and that's alright. Year-to-date, the First Trust Water ETF (NYSE:FIW), as just one example, is higher by 24.17%.
Water ETFs Having a Moment, But More to Come
Water ETFs are typically heavy on industrial and utilities stocks and FIW isn't an exception to that rule as those sectors combine for over 77% of the fund's weight.
However, water ETFs are trouncing those sectors this year. Year-to-date, the S&P 500 Industrial and S&P 500 Utilities indexes are up an average of 15.75% – far beyond FIW. For advisors wondering if water stocks are “just getting lucky” this year, don't worry about that. Over the past three year, the industrial and utilities sectors are up an average of 46% while FIW is higher by 81.3%.
It'd be easy to assume that after a run like that, the case for water stocks is drying up. In reality the opposite may be true.
“Despite some regions in the US grappling with water scarcity, 2.1 trillion gallons of treated drinking water are lost each year in the US due to leakage,” says First Trust Exchange Traded Funds Strategist Ryan Issakanien. “Water main breaks, which increased by 27% from 2012 to 2018, now occur every 2 minutes.6 Cost estimates for updating US water infrastructure vary, but according to the American Society of Civil Engineers—which recently gave US drinking water a grade of C- along with a grade of D+ to wastewater infrastructure—capital investments totaling $3.3 trillion will be needed by 2039 to bring US water infrastructure up to an “A” or a “B” grade.”
Investing in water can be looked as the “other infrastructure” and with infrastructure getting so much buzz these days, it's worth noting there's some water spending included in the infrastructure legislation recently passed by the Senate – $55 billion of the $550 billion in new spending will be directed to water infrastructure, but as the $3.3 trillion figure above confirms, $55 billion is hardly enough.
FIW Has Nearer Term Benefits
Of course, it's going to take awhile for that $55 billion to be spent and have some, if any, impact on FIW components. $3.3 trillion? It's necessary, but that's going to take awhile, too. However, there are still near-term catalysts for FIW.
“Many capital investment projects were postponed in 2020 because of lockdowns and budget constraints due to Covid-19,” adds Issakainen. “The Congressional Budget Office reports that state and local governments account for 90% of public spending on water infrastructure. They faced significant budget shortfalls in 2020. However, the $1.9 trillion American Rescue Plan, passed in March 2021, allocated $350 billion for state and municipal governments.”
Over the long haul, water scarcity and obvious need for improved water infrastructure bolster the case for FIW and long-term is the way to play it because the fund beat the broader market over the trailing year, three-year and five-year periods.
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