The best water stocks to invest in to make a profit

Investing in water means investing in the world’s most vital resource. There will always be a need for water and the companies that distribute it and utilise it. So which are the best stocks for investing in water?

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
The best water stocks to invest in

Water is the world’s most vital resource, but it is also becoming increasingly scarce. Although water covers 70% of the earth’s surface, nearly 98% of that is undrinkable seawater. The United Nations has warned that fresh water shortages could affect five billion people by 2050 as the global population, and the demand for water, rises. Global demand for fresh water from agriculture, industry and households has increased six-fold over the last century and is still going up at a rate of 1% every year. But climate change, drought and pollution means it is harder to come by.

Investing in water could help secure future supplies, as well as potentially securing you a healthy and steady return. If you’re interested in investing in water, here are some ways to do it and make a profit in the long term.

Water stocks

If you want to hold water utility stocks, there are three big listed UK water companies: Pennon, United Utilities and Severn Trent.

Water utility companies are seen by some investors as being quite ‘boring’ names, as are many other big utility companies, like electricity or gas suppliers. They are viewed as defensive holdings, able to perform well under most market conditions, but with little prospect for exciting or rapid share price growth. But that quality makes them an important consideration for any stock portfolio, holding their own when stocks more exposed to economic cycles suffer a downturn. These qualities can make them expensive in falling markets as they can offer a shelter from market turbulence.

Although the water stocks might look like a safe bet, there are of course some risks. At the start of 2018, Goldman Sachs analysts warned that the UK water company stocks might underperform their European counterparts in the face of a regulatory review, potential interest rate rises, and risks from changes in political leadership. This latter point refers to Labour’s growing popularity in the polls, and its 2017 manifesto pledge to nationalise water services.

Away from the utility giants, some of the best stocks for investing in water might include those serving the sector in other ways. For example, Polypipe makes plumbing and drainage systems and water management products sold throughout the UK and Europe. It is listed on the FTSE 250 and its share price has gained more than 40% over the last three years.  

You could also look further afield — potential opportunities in Europe include names like French water and waste utility companies Suez and Veolia, which are rumoured to be considering a merger.

Another option for investors in the future could be found in the bond space. Last year, Anglian Water launched the first ever water utility green bond to finance its sustainability strategy, and other firms are expected to follow suit.

Invest in water ETFs

The issue with buying stocks in one or two water companies is that you can end up with too much stock-specific exposure. Even if the overall water theme does well, a management or operational problem in one company you hold could cause your stock to falter and wipe out some of your portfolio’s gains. To spread your risk across the sector, you could buy an exchange traded fund (ETF) instead.

A popular product is the iShares Global Water Index ETF, which replicates the performance of the 50 stocks in the S&P Global Water index. PowerShares offers more than one water ETF, including PowerShares Global Water Portfolio, which tracks the 35 stocks in the Nasdaq’s Global Water index, and PowerShares S&P Global Water Index Portfolio. There’s also Lyxor World Water, First Trust Water ETF, and the Tortoise Water fund.

You can use IG’s ETF screener to find water ETFs for your portfolios.

Investing in water using funds

Another way to diversify your water holdings is by buying a global thematic fund designed to tap into the water story from various angles. The Pictet Water fund, for example, invests in a mix of utility companies, water technology companies making pipes and pumps, and environmental services companies involved in water treatment and waste processing.

Other options for UK retail investors include the Premier Global Infrastructure trust. Formerly known as the Premier Energy and Water trust, it was renamed last year to reflect a wider remit, with more exposure to non-utility infrastructure like roads and ports. However, investors will still get exposure to the water sector through the fund. The Impax Environmental Markets investment trust could also be a good bet for those wanting to invest in water treatment and waste technology, with the need for cleaner water looking set to be an important theme for years to come.

Find out more about diversifying your investment portfolio with different types of stocks.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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