Are these the best water stocks and ETFs to watch?

What's on this page

1. What you need to know about the water industry
2. Types of water stocks
3. Why invest in water stocks
4. What moves the market for water company stocks
5. The top water ETFs to watch
6. How to start investing and trading in water

What you need to know about the water industry

Water is crucial to every country in the world, but each one manages their resources differently. Historically, water has been owned and managed by the state to ensure citizens have access at the right price. However, many countries have gradually turned to the private sector after realising public ownership was not delivering the funding for the innovation needed to tackle the growing challenges of the market. Privatisation may have put a vital commodity into the hands of profiteering business, but it has also provided greater investment and a faster pace of development.

Some nations have embraced privatisation more than others. For example, England’s entire market is privatised while governments in countries like France, Spain and India still manage some of their own water supplies. Some prefer to let private companies manage the whole network while others prefer private-public partnerships. Understanding the regulatory environment of each country is just as important as understanding the investment case for each stock.

Types of water stocks

Water industry: regulated vs unregulated

Those countries that have privatised water have kept a tight grip on the market by ensuring it is highly regulated. Most privatised industries are managed by a regulator that enforces strict limits on how much money they can make by selling water or operating wastewater systems like the sewers. Such regulators may set price caps on customer bills or demand a certain level of investment.

A regulated sector is defined as any industry that has its revenue constrained by economic regulations in some form. This means companies are limited in terms of the amount of revenue and profit it can make by selling water, but it makes their income more reliable too.

Unregulated businesses are not subject to any limitations. This means income from these activities is less predictable but able to grow at a much faster rate than regulated businesses. Many of the worlds water stocks have a mixture of regulated and unregulated businesses, giving them a mix of the two. Some unregulated areas that are particularly popular among water stocks is solid waste management, recycling, or supplying water to businesses through private water networks. Again, the prominence of regulated water markets differs depending on a country.

Water utilities vs other water stocks

Water stocks can be broadly split into two types. The first are water utilities that are responsible for treating and distributing drinking water to the public. These largely operate in regulated markets. The second are companies that supply the utilities with technology, equipment or services that help them run their networks or improve their businesses.

Why invest in water stocks?

Stable businesses suited to long-term investors

Water utilities are regarded as stable businesses that are far less volatile than other industries. Their predictable nature means they are suitable for long-term investors and are regarded as defensive plays that can help shield investor’s money when the rest of the market is struggling.

The other major benefit of water utilities is dividends. Water stocks tend to pay reliable and generous dividends because shareholders have limited ability to benefit from share price appreciation. Investors should therefore pay attention to each stock’s dividend policy and calculate a stock’s dividend yield (annual dividend divided by the share price) to identify whether a stock is overvalued or undervalued.

What you need to know about dividend policies

What moves the markets for water company stocks?

Water stocks tend to be unaffected by most events that can dramatically effect share prices of other types of businesses. Still, there are a number of things that can have a material effect on their share prices:

Regulatory environment

The stability of water stocks is derived from the fact that their activities are regulated. Any changes to the regulatory environment can therefore have a dramatic effect on the investment case. For example, the UK’s water regulator Ofgem sets price limits every five years and any changes can have a profound effect on the industry’s profitability.

Politics can also cause dramatic effects on water stocks. Fears have been growing for UK water stocks after the opposition Labour Party promised to renationalise them.

Financial results

Releasing financial results can impact share prices of water stocks just like any other company. This is when shareholders find out how well the company has performed and when they can compare each stock in the market. There is rarely big difference between each water utility, so one outperforming another can be a big deal. The dividend, although often known in advance, is also confirmed when results are released.

How to pick the best dividend stocks

Mergers and acquisitions (M&A)

Mergers and acquisitions (M&A) can also influence the share price of water stocks. A bid for a water company can reset the valuations being attributed to the industry. For example, if a company makes a bid at a huge premium, this could filter through to others. One growing theme in the M&A space has been the involvement of private equity, which has been snapping up water stocks over recent years.

Interest rates

Water stocks are generally regarded as defensive safe havens for investors. Therefore, the attractiveness of them can wane, if interest rates are rising. This is because the low-but-stable returns delivered by the industry look less attractive when interest rates are higher, and investors can earn better interest through the likes of savings accounts.

How to trade interest rates

The top water ETFs to watch

Water exchange traded funds (ETFs) use the power of pooled funds to invest in a wide selection of water-related companies, providing greater convenience to investors. Here, we look at five water ETFs that have been noteworthy performers in recent years. To view any of the entries below, in addition to a variety of other water ETFs, please make use of our ETF screener.

1. Invesco Water Resources ETF (NASDAQ: PHO)
2. First Trust Water ETF (NYSEARCA: FIW)
3. Invesco Global Water ETF (NASDAQ: PIO)

4. Guggenheim S&P Global Water Index ETF (NASDAQ: CGW)

5. iShares Global Water UCITS ETF

Invesco Water Resources ETF (NASDAQ: PHO)

The Invesco Water Resources Portfolio is based on the Nasdaq OMX US Water Index. This index attempts to track the performance of exchange-listed US companies involved in water purification and conservation products for homes, businesses and industries. The fund invests at least 90% of its total assets in common stocks, American depositary receipts (ADRs) and global depositary receipts (GDRs).

First Trust Water ETF (NYSEARCA: FIW)

The First Trust Exchange-Traded Fund - First Trust Water ETF is based on the ISE Clean Edge Water Index. The index is weighted by market capitalisation, and tracks the top 36 companies that derive a substantial portion of their revenues from the potable and wastewater industry.

Invesco Global Water ETF (NASDAQ: PIO)

The Invesco Global Water Portfolio is based on the Nasdaq OMX Global Water Index, and generally invests at least 90% of its total assets in companies listed on a global exchange. These companies, much like Invesco’s US-focused water ETF, create products designed to conserve and purify water for homes, businesses and industries.

Guggenheim S&P Global Water Index ETF (NASDAQ: CGW)

The Guggenheim S&P Global Water Index ETF is based on the S&P Global Water Index. The index’s constituents comprise of water utility, infrastructure, equipment and material companies. Generally, the fund invests at least 90% of its total assets in securities, American depositary receipts (ADRs) and global depositary receipts (GDRs).

iShares Global Water UCITS ETF

The iShares Global Water UCITS ETF is based on the S&P Global Water Index, and offers broad exposure to companies related to water. It has made direct investments in the top 50 global water companies and aims to track their performance. This means it, like other water ETFs, has the stability of a water stock but with less risk because of its diversification.

How to start trading and investing in water

1. Research the companies
2. Decide whether you'd like to buy the shares or trade them
3. Open an account
4. Place your trade

Once you have your strategy and have decided how you would like to trade, you can open an IG account to get started. Or, if you want to try out your strategy, then try an IG demo account.

But, remember that all trading and investing incurs significant risks. Always ensure that you can afford to take the risk of losses before opening a position.

Learn more about managing your risk