PHO - FIW ETF: Investing In Water

2023-12-28 19:21:31 ET

Summary

• First Trust Water ETF provides broad exposure to the water industry through a passively managed fund.
• Investing in water stocks is attractive due to growing demand, limited supply, infrastructure investment, regulatory factors, and diversification benefits.
• FIW has outperformed other water ETFs in terms of annualized returns and offers a favorable backdrop for investment in the water industry.

I've talked about investing in water as a theme before here on Seeking Alpha, and think it's worth exploring another way to get access through the First Trust Water ETF ( FIW ). FIW is a passively managed exchange-traded fund, or ETF, that aims to provide investors with a broad exposure to the water industry. Launched on May 8, 2007, this fund seeks to replicate, before fees and expenses, the price and yield performance of the ISE Clean Edge Water Index, a modified market capitalization-weighted index. The index is comprised of companies that generate a substantial portion of their revenues from the potable and wastewater industry.

The fund's investment strategy delineates a series of eligibility criteria, including market capitalization, liquidity, and weighting concentration requirements that a stock must satisfy to qualify for inclusion in the Index. The Index selects the top 36 stocks in the industry by market capitalization and is rebalanced semi-annually.

Investing in water stocks can be an attractive opportunity due to several key factors:

1. Growing Demand: Water is a basic necessity for human survival, and its demand is increasing rapidly due to population growth, urbanization, and industrialization. As water scarcity becomes a global issue, the demand for water-related services and infrastructure is expected to rise.

2. Limited Supply: Despite covering about 70% of the Earth's surface, only a small percentage of water is suitable for consumption. Climate change, pollution, and poor water management further exacerbate the scarcity of clean water. This limited supply creates an opportunity for companies involved in water treatment, purification, and distribution.

3. Infrastructure Investment: Governments and private entities worldwide are recognizing the need to invest in water infrastructure to address aging systems, improve efficiency, and ensure water security. This presents opportunities for companies involved in water infrastructure development and maintenance.

4. Regulatory and Compliance Factors: Strict regulations regarding water quality and environmental protection drive the need for advanced technology and solutions. Companies providing innovative water treatment technologies and sustainable solutions are likely to benefit from these regulations.

5. Diversification: Investing in water stocks can provide diversification benefits to an investment portfolio. Water-related companies operate across various sectors, including utilities, infrastructure, technology, and consumer goods, which can help spread risk.

Convinced yet?

FIW ETF Holdings

FIW's portfolio includes 37 stocks, with the five largest holdings accounting for approximately 21% of the fund's total assets. Top holdings include:

• Advanced Drainage Systems, Inc.: A frontrunner in offering cutting-edge solutions for water management.
• Ecolab Inc.: A renowned global frontrunner in providing comprehensive solutions and services for water, hygiene, and infection prevention.
• IDEXX Laboratories, Inc.: A pioneering company in revolutionizing pet healthcare, catering to veterinarians worldwide with an extensive range of diagnostic and technology-driven products and services.
• Ferguson Plc: The foremost expert in distributing plumbing and heating products on a global scale.

Sector Composition and Weightings

The industrials sector holds the lion's share, accounting for 52% of the total portfolio. Utilities and Healthcare follow, with 18% and 16% weighting, respectively. Information Technology, Materials, and Consumer Staples sectors also form part of the fund's portfolio, albeit with less significant weightings.

Peer Comparison

FIW stands alongside the Invesco S&P Global Water Index ETF ( CGW ) and the Invesco Water Resources ETF ( PHO ). Comparatively, FIW has been able to outperform these alternatives in terms of annualized returns.

Pros and Cons of Investing in Water

Investing in the water industry carries both merits and drawbacks. Its primary advantage lies in the essential nature of water and the ever-growing demand for efficient water management solutions. This demand, coupled with the significant infrastructure spending required for potable and wastewater services, provides a favorable backdrop for investment.

However, potential investors should also be aware of the challenges facing the industry. Key among these is the high capital expenditure required for infrastructure renewal and the persistent supply chain problems facing the industry. The ability to finance these projects, the impact of regulatory changes, and the limited ability of utilities to pass on the full cost of providing services to consumers are other factors to consider.

Concluding Thoughts

Investing in the First Trust Water ETF is a good way to gain exposure to the potentially lucrative water industry. I like the theme and think it's worth considering a small allocation as part of one's equity basket.

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