February 5th, 2022

Is water the most overlooked investment opportunity in the world?

Dear Rebel Investor,

I once trekked through the Himalayas.

In preparation for that trip, I put together an array of equipment I thought I’d need.

The most important piece was a portable water purifier.

I knew it would come in handy for purifying water from mountain streams and lakes.

But after two weeks using it in Kathmandu – the first stop on my trip – the filter became hopelessly clogged.

WTF?

That filter was supposed to last for six months!

Was it defective?

Nope.

I made that determination after putting in another filter… which also got all clogged up in a couple of weeks.

Turns out that the tap water in Kathmandu was beyond polluted.

Since that second filter was my last one, I realized I’d have to rely on bottled water for most of my trip.

Unfortunately for Kathmandu’s poor, they can’t afford bottled water.

Neither can much of the world.

In fact, the World Health Organization and UNICEF say that one in four people globally lack safe home drinking water.

They also say that nearly half the world’s population lacks proper water sanitation.

Here’s something else that’s hard to swallow…

Unsafe water kills more people every year than war and all other forms of violence combined.

The source of the problem is that water is a poorly managed resource

There’s plenty of water in the world… but 97.2% of it is in our seas and oceans.

That means only 2.8% of our water is freshwater.

And only 1% of that is easily accessible.

(The rest is either too deep underground to be affordably extracted, or it’s locked up in glaciers, polar caps, the soil and atmosphere.)

Making matters worse, a lot of our easily accessible freshwater is polluted.

We can thank the stupid practice of dumping most of our wastewater into the ocean, rivers and lakes for that.

According to the National Resources Defense Council (NRDC), 80% of the world’s wastewater is discarded this way.

In the U.S., the Environmental Protection Agency (EPA) says that nearly half of American rivers and streams, and a third of the country’s lakes, are unfit for fishing, swimming or drinking.

That’s mainly due to phosphates from farm waste and fertilizers leaching into our freshwater.

Municipal and industrial waste discharges make matters worse.

Not to mention all the random junk that industry and individuals dump directly into our waterways. 

And if all that weren’t bad enough, thanks to climate change we’ve now got droughts plaguing many parts of the world.

Bottom line – freshwater is scarce and becoming scarcer, while demand for it from industry and the world’s growing population will only accelerate.

That means the price of water has only one way to go – up

The best way to invest in water… is to invest in water.

In other words, directly investing in controlling water rights is the easiest way to cash in on global water scarcity.

The uber rich know that.

Take the late Texas billionaire T. Boone Pickens.

He spent a fortune to secure thousands of acres – and the water rights that came with them – on land that sits over the Ogallala Aquifer in West Texas.

He cashed in on all that to the tune of $103 million in 2011 when he sold out to a Texas water supplier.

Former President George H.W. Bush and his family were also big investors in water rights. 

Then there’s Michael Burry, who reportedly made $800 million on betting against the housing market during the financial crash of 2007-2008.

Burry is now focusing all his trading on one commodity – water.

Mega corporations and banks are also investing directly in water.

They include Goldman Sachs (NYSE: GS), JP Morgan Chase and Company (NYSE: JPM), Citigroup (Nasdaq: C), UBS Group AB (NYSE: UBS), Deutsche Bank (Nasdaq: DB), and the Blackstone Group (NYSE: BX).

Unfortunately, investing directly in water is a big boys’ game.

That leaves most retail investors like us out of it.

But that doesn’t mean we can’t profit from water in other ways.

How retail investors can profit indirectly from water scarcity

One way is through stocks that rely heavily on the water market for profits.

A good place to find candidates worthy of investment is by researching the holdings of a water index.

I suggest the Dow Jones U.S. Water Index (DJUSWU) for starters.

It lists 29 of the top water-related companies in the U.S.

They include beverage producers, utilities, companies that treat and purify water, water-related equipment makers, and companies involved with desalination plants.

Another option is to buy a water exchange traded fund (ETF).

For example, there’s the Invesco Water Resources ETF (Nasdaq: PHO).

This fund, which has $2.1 billion in assets, invests in public U.S. companies that conserve and purify water in homes, businesses and industries. 

Another water ETF is the First Trust Water ETF (Nasdaq: FIW).

First Trust Water (with $1.6 billion in assets) invests in the top 36 American companies involved in potable and wastewater industries.

Want to expand your reach outside of the U.S.?

Then take a look at the Invesco S&P Global Water Index ETF (Nasdaq: CGW).

This fund (with $1.2 billion in assets) invests in the top 50 water-related companies worldwide.

Another interesting option is to invest in a holding company that manages water supply and distribution.

One to consider is the California Water Service Group (NYSE: CWT), which has a market cap of $3.2 billion.

It focuses on drought-stricken California, as well as parts of Maui, Washington State and New Mexico.

I’ll close this missive with one last observation – I don’t see investing in water through stocks or ETFs as ways to make lightning-fast profits.

But if you’re a long-term retail investor willing to hold these instruments for a while, I think they’re solid plays.

As I said earlier, I can’t see water prices going anywhere but up.

 Doug Fogel
Contributing Editor, Dear Retail

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