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This $1 billion ETF is a smart way to invest in water, Bank of America says. Here’s what’s in it

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The demand for water is going to become a growing concern in decades ahead, and there are already tools for investors to gain exposure to the sector, according to Bank of America. The combination of a growing global population, rising temperatures and the demand for water from areas of the economy like data centers will elevate the importance of water supply, Bank of America strategist Haim Israel said in a Nov. 1 note to clients. “Water demand already exceeds population growth by 1.7x. The world’s population is set to peak at c.10bn by 2050, while urbanisation is rising dramatically with 25% of the global population moving to cities, driving demand. Even GDP growth should translate to a 400% increase in water demand by 2050. This is an era of hyper consumption like fast fashion, food and technology, which boosts water use. It takes 3 weeks’ worth of showers to make one t-shirt and 3.5 months’ worth for a 1kg steak,” the note said. There is already an ETF focused on water that has proven successful. The First Trust Water ETF (FIW) has an average annual return of 10.5% over the past decade, according to FactSet, and is the top rated fund in the space by Bank of America ETF strategist Jared Woodard. “FIW has captured 50% of flows since 2021, has outperformed other water ETF peers by 175% on average since 2008, and beat the S & P 500 by 7% over the same period. As the impending realities of water scarcity become clearer, we expect water funds to benefit,” Woodard said in a Nov. 6 note. FIW ALL mountain The First Trust Water ETF (FIW) has a solid long-term track record. But the idea of investing in water can be a hazy concept, so investors should take a look at what any water-focused fund actually owns. The First Trust fund appears to have heavy exposure to water infrastructure plays. Industrials made up nearly 52% of the fund’s portfolio as of Nov. 8, according to First Trust’s website. When adding in utilities, more than 70% of the portfolio is spoken for. “Companies are likely to transform as water scarcity intensifies, but current fund makeup could overlap with preexisting sector allocations. Water ETFs are heavy in industrials and utilities, meaning investors should be careful not to allocate twice to the same sectors,” Woodard said. Investors should be aware that the heavy exposures to industrials and utilities could make the fund susceptible to factors that have little to do with the supply of water, such as interest rates and the economic cycle. The fund’s largest holdings are Roper Technologies , Ferguson and Ecolab . Roper is a technology conglomerate, not a pure-play water stock. The company estimated in a September conference presentation that about 25% of its business comes from medical and water products. One of its subsidiaries is Neptune Technology Group, which helps utility companies monitor water usage. Ferguson, meanwhile, is an industrial company whose services include plumbing and sewage equipment. Ferguson’s clients include large commercial buildings and water utilities. Minnesota-based Ecolab, meanwhile, bills itself as a sustainability company, and its offerings include helping clients optimize water and energy use. The fund is relatively large for a thematic ETF, with about $1.3 billion in assets under management. However, it does not appear to be highly popular with traders, as it regularly sees daily trading volume below 50,000 shares and has just $21 million of net inflows this year, according to FactSet. The fund’s net expense ratio is 0.53%. And even though the fund’s long-term track record is strong, the ETF had a total return of 3.6% year to date through Nov. 8, well below that of the S & P 500.

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