Assets Under Management AUM

The 3 Best Water Funds for Opportunity-Focused Investors

Water is one of the most used and coveted resources in the world. Similar to other commodities like gold and oil, water-related assets can significantly diversify any portfolio. Accordingly, finding the best water funds for investors to buy, to provide diversified exposure to this space, is a worthy quest.

Of course, with commodities on a tear, many water bottoms have been doing pretty well lately. Supply chain constraints have led to situations where utilities and other safe-haven assets have come under bid. Interestingly, this happened as interest rates rose.

This is normally not the case, as many of these assets are considered substitutes for bonds. And with bond yields now offering investors meaningful returns, the question is whether the rally in utilities and their peers can continue.

There aren’t many exchange-traded funds (ETFs) that offer direct exposure to the water sector, so finding a good fund can be tricky.

For investors looking for stable long-term total returns, however, I think there are a few opportunities to consider. Here are three funds that I think offer great ways for investors to play in the water space right now.

OPS Invesco Water Resources ETF $48.58
FIW First Trust Water ETF $76.33
CGW Invesco S&P Global Water Index ETF $44.33

Invesco Water Resources ETF (PHO)

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Invesco Water Resources ETF (NYSE:OPS) is a leading ETF focused on tracking the performance of US NASDAQ OMX Water Index. PHO’s assets consist primarily of businesses that purify and conserve water for industrial, residential and commercial purposes.

Given the intense water shortages we are seeing, the Water Resources ETF is a great way for investors to gain exposure to what could become a lucrative long-term sector.

This fund has amassed approximately $1.76 billion in assets under management (AUM). Some of PHO’s major holdings include American hydraulic works (NYSE:AWK), Ecolab Inc. (NYSE:ECL), Roper Technologies Inc. (NYSE:ORP)., Xylem (NYSE:XYL) and Danaher Corp. (NYSE:HRD). Manufacturers of hydraulic machinery dominate the fund, accounting for 32% of its assets. It is closely followed by water utilities, which make up 18% of the fund’s assets.

The yield of this ETF is just below 0.3%. Therefore, yield-seeking investors can instead purchase a number of individual PHO stocks with higher yields. That said, over the long term, this fund’s diversified exposure to the necessary and stable water sector remains attractive.

First Trust Water ETF (FIW)

Tiles that say ETF on stacks of coins on blue background

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An intriguing exchange-traded fund dominated by mid-cap stocks is the First Trust Water ETF (NYSEARC:FIW). Notable holdings of this ETF include Aecom (NYSE:MCA), Essential utilities (NYSE:WTRG), American Water Works and Xylem.

FIW tracks the ISE Clean Edge Water Index, which selects stocks in the wastewater sector that meet certain requirements for liquidity, market capitalization and weighting concentration. As a result, using these filters, this ETF has put together a relatively concentrated portfolio of 36 holdings from top industry players. To ensure that a single stock never dominates the exchange-traded fund, the portfolio is rebalanced semi-annually.

FIW has generated an average annual return of 13.1% over 10 years. That’s not bad, and FIW actually outperformed its benchmark, the Russell 3000 IndiaX. Also, the ETF is one of the cheapest funds with an expense ratio of 0.53%.

This fund yields 0.4%. It’s certainly nothing to get excited about. But this ETF’s stock-picking methodology makes it an attractive option for investors seeking exposure to water-related assets.

Invesco S&P Global Water Index ETF (CGW)

Flooded quarry for limestone extraction.  Turquoise water.  White beaches.  Water stocks.

Source: Klintsou Ihar / Shutterstock.com

For those looking for a more holistic way to play this sector, the Invesco S&P Global Water Index ETF (NYSEARC:CGW) is probably the way to go. Interestingly, this fund actually earns 2%, providing significant income for investors looking for passive income streams. The fund was able to generate this return due to its focus on developed and emerging markets in the water utilities, infrastructure, equipment and materials sectors.

This ETF is a multi-cap mixed fund that tracks the S&P Global Water Index.

More than 94% of the Invesco S&P Global Water Index ETF portfolio is allocated to utilities and industrial companies.

CGW’s main holdings include a French waste management, water management and energy services company Veolia Environment SA (OTC:VEOEY); American Water Works Co. Inc. and Xylem,

As of the date of publication, Chris MacDonald had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Chris MacDonald’s love of investing has led him to pursue an MBA in finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. . His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative long-term investment outlook.