Water Investing: 5 Funds You Should Tap

First Trust Water ETF

• Assets under management: $1.6 billion
• Dividend yield: 0.6%
• Expenses: 0.53%, or $53 annually for every $10,000 invested

Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, has invested in water via the First Trust Water ETF (FIW, $96.61) in portfolio models for years.

"I've used it in lieu of traditional utility funds," he says, "but more importantly due to the thesis on the importance of water sustainability, the increased future scarcity of water and the need for more efficient and effective potable water solutions, as well as storage and transportation of the resource."

The First Trust Water ETF tracks the ISE Clean Edge Water Index, which holds companies in the potable water and wastewater industry with worldwide market capitalizations of at least $100 million. It’s a "modified" market cap-weighted index that, at each semiannual rebalancing, assigns the top 10 stocks by size a weight of 4%, the next 10 a weight of 3.5%, and so on. Thus, larger companies have a greater effect on performance than smaller ones, but those smaller firms have more influence than they would have in a traditional cap-weighted portfolio.

If you're doing your water investing via funds, get used to tight portfolios: FIW, for instance, holds just 36 stocks. Top holdings include the likes of water treatment technology firm Veralto (VLTO); Xylem (XYL), which offers up a wide swath of water and wastewater technology products; and American Water Works (AWK), which provides water-utility services in several states.

"As the world's population continues to expand, clean and safe drinking water will be one of the top priorities in order to promote and protect human life," Milan says. "These companies will have their hands in making this a possibility for nations all around the world."

MSCI's ESG Fund Ratings rates First Trust Water ETF at AA – the second-best rating, and within the system’s so-called Leader tier.

Learn more about FIW at the First Trust provider site.

Calvert Global Water Fund A Shares

• Assets under management: $586.9 million
• Dividend yield: 1.2%
• Expenses: 1.24%

The Calvert Global Water Fund A Shares (CFWAX, $27.54) is a water investing mutual fund that seeks to track the Calvert Global Water Research Index, CALH2O, a proprietary index comprised of "companies that manage water use in a sustainable manner and are actively engaged in expanding access to water, improving water quality, promoting the efficient use of water, or providing solutions that address other global water challenges."

This gives CFWAX access to "the water value chain not found in other strategies”" that typically only focus on water-related industries, says Calvert's Eames.

"We invest in companies representing the supply side, such as water utilities, water infrastructure and water technology companies, as well as on the demand side through investments in companies in water-intensive industries that are leading in their water stewardship and water efficiency," he says.

The resulting portfolio includes top holdings such as water and hygiene specialist Ecolab (ECL), Xylem and Idex (IEX), a diversified industrial firm that provides water metering and flow technology products and services, among many other things.

Eames adds that CFWAX "also employs a shareholder engagement strategy which seeks to improve companies' performance on financially material ESG issue areas, including water use and efficiency." The company's engagement team works with investor groups and policymakers to drive positive change. It also files shareholder resolutions and manages all proxy voting for the Calvert funds.

Note that CFWAX, which also receives MSCI's AA rating, is one of the more expensive ways to invest in water. In addition to a 1.24% expense ratio, investors also pay a 5.25% front-end sales load unless their brokerage waives or lessens the load. (Fidelity and Schwab are examples of brokerages that will waive the load on CFWAX.)

If your broker doesn't waive the load, you might want to consider the ETFs or the no-load water-themed mutual fund on this list instead.

Learn more about CFWAX at the Calvert provider site.

Invesco Water Resources ETF

• Assets under management: $2.0 billion
• Dividend yield: 0.5%
• Expenses: 0.60%

Invesco’s flagship water-themed fund, Invesco Water Resources ETF (PHO, $63.04), was launched in 2005, making it one of the oldest water investing funds you can find.

PHO tracks the Nasdaq OMX US Water Index, which invests in companies that purify and conserve water for home, business and industrial users. Rene Reyna, head of thematic and specialty product strategy at Invesco, adds that these companies "must be engaged in the Green Economy, which factors in their contributions to improving the water space as determined by Sustainable Business LLC."

Invesco also offers a global version of this fund, the Invesco Global Water ETF (PIO). That said, it’s not nearly as popular, at $2790 million in assets, and it trades about 10,000 shares per day on average compared to 72,000 for PHO.

That's OK. While the Invesco Water Resources ETF only invests in U.S.-listed companies vs international stocks, many of these businesses – including Danaher (DHR) and Roper Technologies (ROP) – are multinational operators.

"So while its sister fund, PIO, may provide enhanced international diversification, PHO by no means misses out on the global opportunity of water resource investment," Reyna says.

PHO earns five stars and a bronze badge from Morningstar for, among other things, strong past performance compared to peers and relatively low costs. It also earns an AA ESG rating from MSCI.

Learn more about PHO at the Invesco provider site.

Invesco S&P Global Water Index ETF

• Assets under management: $945.7 million
• Dividend yield: 1.5%
• Expenses: 0.56%

The Invesco S&P Global Water Index ETF (CGW, $53.34) could be considered a more traditional way of investing in water than PHO or PIO.

This ETF tracks the S&P Global Water Index, which focuses on the 100 largest companies in water-related businesses across the globe. CGW targets two distinct segments – water equipment and materials, and water utilities and infrastructure.

“By investing in the underpinnings of the water infrastructure, including water utilities, equipment, instruments and materials, CGW offers a different way to invest in the water theme,” Reyna says.

The fund is tilted slightly toward U.S. vs non-U.S. companies, with the bulk of the non-U.S. holdings coming from Europe. Top holdings from across the pond include U.K.-based utility stock Severn Trent.

CGW also earns four stars from Morningstar, as well as an AA ESG rating from MSCI.

Learn more about CGW at the Invesco provider site.

Fidelity Water Sustainability Fund

• Assets under management: $99.4 million
• Dividend yield: 0.4%
• Expenses: 0.93%

Fairly new to the water investing scene is the Fidelity Water Sustainability Fund (FLOWX, $16.47).

Launched in April 2020, FLOWX invests at least 80% of its assets in water sustainability companies, such as those involved in water resources, treatment or distribution. These can include the companies found in the S&P Global Water Index, but the managers also reserve the right to choose other companies they feel meet the fund’s criteria.

When the managers do deviate, it’s usually to smaller, growth-oriented companies, which pulls this Fidelity mutual fund into the mid-cap growth style box.

Morningstar analysts warn that the fund has high fees, which create a high hurdle to clear.

And as many themed funds tend to be, FLOWX is fairly concentrated at just 30 holdings, most of which are U.S.-domiciled. The top 10 holdings – which include Xylem and Tetra Tech – account for nearly 60% of the portfolio's assets. Investors should be wary of concentration risk if they hold the same companies elsewhere in their portfolios.

Of the five water investing options in this article, FLOWX deserves the most scrutiny before jumping in given its relatively short track record.

Still, MSCI's ESG Fund Ratings rates the product at AA.

Learn more about FLOWX at the Fidelity provider site.

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