It’s been widely reported in recent weeks that nearly three-fourths of the American West is grappling with the most severe drought in the recorded history of the U.S. Drought Monitor. Conditions this spring are much worse than a year ago and hot and arid conditions will exacerbate the threat of wildfires and water supply shortages this summer. Parts of California, Nevada and Washington State experienced sweltering triple-digit temperatures over the past week and states released excessive-heat warnings and heat advisories in some areas.  At the same time, factors such the reopening of industrial and commercial activities following the successful development and distribution of COVID vaccines and fiscal as well as monetary stimulus that are leading to broader economic strength and recoveries around the world all contribute to a favorable outlook for the water sector-one of a number of sectors qualifying as a thematic approach to sustainable investing¹.

Investing in water-related stocks, including, for example, companies whose main business is in the water-related resource  sector, such as water treatment, engineering, filtration, environmental controls, water related equipment, water and wastewater services and water utilities, to mention just a few, offers investors an opportunity to diversify their portfolios, gain exposure to a theme with favorable prospects and at the same time integrate a sustainable investing strategy into a broader portfolio that aims to emphasize sustainable investing through long-term value creation.  While returns can be attractive over short-to-intermediate time frames, as illustrated by the average trailing 12-month returns of 45.7% for the segment of water-related mutual funds and ETFs versus 40.3% for the S&P 500 Index, investors should also be prepared for bouts of volatility.  In 2018, some funds gave up as much as -14.21% while the S&P 500 posted a drop of -4.4%.   

Investors who wish to focus on water-related investments have a number of mutual fund and ETF pure plays to consider.  These are thematic funds that qualify as sustainable investments based on their sector orientation.  At the same time, some of the funds also engage in ESG Integration approaches as detailed in Table 1. Table 2 lists the same funds along with their expense ratios, size and performance track records for intervals ending as of May 31, 2021 while Chart 1 displays average annual rates of return for intermediate-term time intervals.