Thematic Equity Investing: Water related activities

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The Bottom Line: Sustainable investors who wish to focus on water-related investments have a number of mutual fund and ETF thematic pure plays to consider.

Investing case

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.    

Summary analysis

  • Ten equity water-related mutual funds and ETFs are in operation, including five ETFs.
  • The segment is dominated by passively managed funds (index funds), but three actively managed mutual funds are also available.
  • Eight of ten funds invest in stocks of US companies as well as foreign firms; two ETFs invest in companies listed in the US, including American Depositary Receipts (ADRs) that provide some foreign exposure.
  • Five funds and ETFs pursue an explicit sustainable investing strategy.  That said, the approaches vary and investors should consider funds that align with their sustainability preferences.
  • The ETFs in the segment have posted the some of the best performance track records over time periods extending to five years, reaching 18.5% and 19.7% in two instances; these funds also levy the lowest expense ratios. In fact, the funds with the best intermediate term track records are offered to investors at the lowest fees—displaying expense ratios that fall within the lowest quartile up to 57 bps. These also correspond to the largest ETFs in terms of assets under management. The largest funds with the lowest expense ratios correlate highly with the best total return results.

Top picks

  1.  First Trust Water ETF (FLOWX), one of the largest in the segment at $996.3 million in assets with a 54 bps expense ratio that was up an average annual 19.74%, 20.8% and 50.4% for the 5-, 3- and one-year periods ended May 31, 2021.
  2.  Invesco Water Resources ETF (PHO), the largest fund in the segment at $1,661.4 million in assets, the fund charges 60 bps and returned 18.5%, 19.0% and 45.8% for the 5-, 3- and one-year intervals ended May 31, 2021.
  3. Ecofin Global Water ESG ETF (ECOAX) is considerably smaller than the first two picks and it hasn’t been around as long (its current tracking index was adopted as of June 15, 2018). The fund is subject to the lowest expense ratio at 40 and unlike the other two picks, the fund employs and explicit ESG integration approach.
Table 1: Listing of equity thematic water-related funds and their sustainable investing approach
Fund NameMF/ETFActive/PassiveGeographic MandateExplicit Sustainable Investing Approach
Calvert Global Water CMFPGESG Integration Mixed
Virtus AllianzGI Water Class CMFAGESG Integration-Mixed (1)
Calvert Global Water AMFPGESG Integration Mixed
Virtus AllianzGI Water Class AMFAGESG Integration-Mixed (1)
KBI Global Investors Aquarius InstlMFAGESG Integration
Fidelity® Water SustainabilityMFAGNone
Calvert Global Water IMFPGESG Integration-Mixed
Virtus AllianzGI Water Class PMFAGESG Integration-Mixed (1)
Virtus AllianzGI Water Inst ClassMFAGESG Integration-Mixed (1)
Invesco Global Water ETFETFPGNone
Invesco Water Resources ETF*ETFPUS ListedNone
Invesco S&P Global Water ETFETFPGNone
First Trust Water ETFETFPUS ListedNone
Global X Clean Water ETF*ETFPGThematic (2)
Ecofin Global Water ESG*ETFPGESG Integration
Notes of Explanation: P-Passive investment fund, A-Active investment fund, G-Global, (1) ESG Integration combines alignment with United Nations Sustainable Development Goals, (2) Seeks alignment with United Nations Sustainable Development Goals, *Top pic. Source: Sustainable Research and Analysis.
Table 2: Listing of equity thematic water-related funds, expenses, AUM and performance records
Fund Name MF/ETFExpense Ratio (%)Assets ($millions)1-Month Return (%)12-M Return   (%)3-YR Return (%)5-YR Return (%)
Calvert Global Water CMF1.9942.61.4345.7112.9411.41
Virtus AllianzGI Water Class CMF1.9770240.6815.9411.95
Calvert Global Water AMF1.24239.51.4946.8213.7812.25
Virtus AllianzGI Water Class AMF1.22270.72.0841.7216.8112.79
KBI Global Investors Aquarius InstlMF1.1175.52.5952.8
Fidelity® Water SustainabilityMF155.51.7140.2
Calvert Global Water IMF0.99266.91.5247.1714.0912.59
Virtus AllianzGI Water Class PMF0.94318.72.1242.2217.1413.1
Virtus AllianzGI Water Inst ClassMF0.93293.72.1242.1917.1513.11
Invesco Global Water ETFETF0.752813.1539.1917.214.18
Invesco Water Resources ETF*ETF0.61661.41.7145.1120.9218.51
Invesco S&P Global Water ETFETF0.57944.32.9246.2518.2114.6
First Trust Water ETFETF0.54996.31.2850.4120.7919.74
Global X Clean Water ETF*ETF0.53.22.58
Ecofin Global Water ESG*ETF0.442.62.5847.817.95
Notes of Explanation: *Top pick. Source: Morningstar Direct.
Chart 1: Average annual rates of return for 1-year, 3-year and 5-year time intervals to May 31, 2021
Notes of Explanation: *Top pick. Source: Morningstar Direct.
¹ While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass: values-based investing, negative screening (exclusions), thematic investing, impact investing and ESG integration, in turn classified into ESG Integration, ESG Integration-Consideration and ESG Integration-Mixed, referring to a core strategy consisting of ESG integration, but exclusions, impact or thematic approaches may also be employed. Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.
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