3 Water ETFs for Thirsty Investors

First Trust Water ETF (FIW)

FIW is one of those ETFs that blurs the line between active and passive management, and that’s not a bad thing. While the ETF does track the ISE Clean Edge Water Index, the index has some stringent filters in place when it comes to market capitalization, liquidity, and weighting concentration.

After these screeners do their job, the index selects the top 36 water industry companies by market capitalization and rebalances them semi-annually. This rules-based methodology results in better consistency compared to active ETFs, and more specificity compared to passive ETFs. 

The ETF has performed exceptionally well, with a five-star Morningstar rating based on its 10-year risk-adjusted return in a universe of 87 natural resource ETFs. Over the trailing 10-year period, the ETF has returned 12.59% annualized, beating the Russell 3000 which returned 12.13%. 

Invesco Water Resources ETF (PHO)

For a more traditional passive indexing approach to water investing, investors can consider PHO, which tracks the NASDAQ OMX US Water Index. This index targets U.S.-listed companies that conserve and purify water for homes, businesses and industries, or manufacture water equipment. 

In terms of industry representation, PHO holds a fairly diversified assortment of water machinery, utility, chemical, construction, and services companies. Like most water ETFs, PHO has a heavy 41.3% mid-cap blend focus. In fact, only around 30% of the ETF is held in large caps. 

In a rare example of more active ETFs beating traditional passive ones, PHO has actually underperformed FIW over the trailing 10 years with a 10.06% annualized return. It also lost to the S&P 500, which returned 12.56% during this period. Still, it remains popular due to Invesco's brand name.

Invesco Global Water ETF (PIO)

For a global focus when it comes to water investing, investors can buy PIO, which is essentially PHO with an international equity allocation. This ETF tracks the similar Nasdaq OMX Global Water Index, which as its name suggests holds global water equities with a mid-cap blend concentration like PHO. 

Like PHO, the majority of PIO's holdings fall into the industrial (44.85%) and utilities (28.09%) sectors. The ETF has a U.S. bias at 54.3% due to the market-cap weighting methodology, with developed and emerging market countries like the U.K., Japan, Switzerland, Brazil, France, and China making up the rest. 

PIO's performance history only goes back five years, where it returned an annualized 6.44%. This dramatically underperformed PHO and FIW, which returned an annualized 11.69% and 11.74% respectively. The underperformance of international equities can be blamed for this. 

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.