Could Water ETFs Be the Next AI Bottleneck Trade?

How Much Water Does AI Actually Need?

The water thesis starts with the physical reality of running AI infrastructure. More powerful graphics processing units (GPUs) pack increasing amounts of computing power into data centers, producing substantial heat that has to be removed.

Water-based evaporative cooling has traditionally been one of the more energy-efficient ways to do it, while water is also consumed indirectly by some of the power plants supplying electricity to data centers. The numbers are beginning to add up.

McKinsey estimates that U.S. data center water consumption could increase roughly 170% by 2030. Its separate research expects the global market for data center cooling equipment to reach $40 billion to $45 billion by 2030, including $15 billion to $20 billion for liquid cooling.

Bloomberg provides another useful estimate. Citing the International Energy Agency, it reported that an average 100-megawatt data center consumes around two million liters of water per day, roughly equivalent to 6,500 households. Global data center water consumption could rise from about 560 billion liters annually to 1.2 trillion liters by 2030.

Location makes the issue more complicated. Bloomberg found that roughly two-thirds of U.S. data centers built or under development since 2022 were located in areas already experiencing high water stress. The Financial Times has also documented growing resistance from rural communities concerned about data centers competing with agriculture and other users for local water supplies.

There is also an important caveat to the investment thesis: technology can reduce water intensity. Microsoft is moving toward closed-loop cooling systems that recirculate water, while liquid and direct-to-chip cooling can reduce dependence on traditional evaporative systems. The Wall Street Journal reports that these approaches are becoming important as the industry's water footprint attracts greater scrutiny.

The Water ETFs Available Today

For investors, that means the opportunity extends well beyond companies that simply own water utilities. Potential beneficiaries span industrial companies supplying pumps, valves, heat exchangers and cooling equipment; technology companies developing liquid-cooling systems and thermal management; water-treatment and filtration providers; wastewater and water-reuse specialists; and utilities responsible for supplying, treating and recycling the water itself.

According to the ETF Central Screener, investors currently have six dedicated water ETFs to choose from. Three come from the same issuer, Invesco, giving it easily the most developed lineup in the category.

The largest is the Invesco Water Resources ETF

, with just shy of $2 billion in assets under management. It's also one of the oldest thematic ETFs around, dating back to December 2005, and charges a 0.50% expense ratio.

PHO tracks the Nasdaq OMX US Water Index and currently holds 41 companies. Overall, I think the thematic relevance here is pretty good. Major holdings include Roper Technologies, Ecolab, Waters Corporation, Ferguson Enterprises, IDEX, Advanced Drainage Systems, American Water Works and Xylem, providing exposure across water treatment, testing, pumps, infrastructure and utilities.

Water isn't a GICS sector of its own, so the portfolio unsurprisingly ends up heavily concentrated in industrials, which account for 47.25% of the ETF. Technology and healthcare make up much of the remaining exposure.

For investors wanting more international diversification, Invesco's other two water ETFs may be more suitable. The larger is the Invesco S&P Global Water Index ETF

, with just over $1 billion in assets under management. It launched in May 2007 and charges a slightly higher 0.58% expense ratio.

CGW tracks the S&P Global Water Index and expands the opportunity set beyond U.S. companies, including foreign securities accessible through American depositary receipts (ADRs) and global depositary receipts (GDRs). The portfolio is also broader, with 66 companies.

There's still substantial overlap with PHO, but the geographic composition is noticeably different. The U.S. accounts for just 58.6% of CGW, providing considerably greater exposure to water companies across other developed markets. Some of those holdings will be less familiar to U.S. investors, making it worth digging into the underlying portfolio rather than treating CGW as simply a more diversified PHO.

Finally, there's the Invesco Global Water ETF

. At roughly $270 million in assets, it's the smallest of Invesco's three water ETFs. It is also the most expensive, with a 0.75% expense ratio.

PIO is essentially the global counterpart to PHO, tracking the Nasdaq OMX Global Water Index. Investors can therefore expect some familiar companies and overlap with PHO, but with a much larger international component. U.S. stocks account for only 50.95% of the portfolio.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.