Can the First Trust Water ETF nourish long-term growth?

Renowned investors from Kiril Sokoloff to Michael Burry have highlighted that global water scarcity presents an opportunity which investors would be unwise to ignore. With the UN’s global Water Conference meeting next month, the First Trust Water ETF has gained 5% year-to-date, and outperformed the S&P 500 over five years.

- First Trust Water ETF gains 5% year-to-date.

- The first UN Water Conference in 50 years is to be held in March.

- Evoqua shares bounce on news of Xylem takeover.

With the First Trust Water ETF [FIW] gaining 4.9% year-to-date, there are reasons to believe that investing in water may be a timely move.

An article in the January issue of Nature highlighted the scale of the global water crisis, explaining that two billion people worldwide lacked access to safe drinking water in 2020. Despite the UN having announced in 2015 that it was set to address this crisis, the UN’s first Water Conference in 50 years will only take place this March.

An open letter from a group of investors ahead of the conference has called on world governments to “incentivise private investments in water solutions and ensure ambitious pre-2030 action”.

Elsewhere, legendary investor Kiril Sokoloff recently told Opto Sessions that the “wars of the future will definitely be over water”.

The First Trust Water ETF has gained 2.9% in the past 12 months, though it fell significantly in the middle of the year before recovering. Over the last five years, FIW has gained 77.4%, significantly outperforming the S&P 500, which has gained 42.8% during that time.

Main holdings see gains

The fund’s largest holding as of 24 February is IDEXX Laboratories [IDXX], a company that mostly produces veterinary products but also has a significant water-testing division. It sells products such as the IDEXX Tecta, which provides fully automated water microbiology testing.

The IDEXX share price has fallen 10.4% in the past 12 months, but gained 14.8% year-to-date. IDEXX accounts for 5.06% of the fund’s assets under management (AUM).

IDEXX Laboratories has no connection to IDEX Corporation [IEX], FIW’s third-largest holding with a 4.20% weighting. IDEX produces fluid and metering technologies including displacement pumps and flow meters, compressors, and injectors. IDEX’s stock performance is in stark contrast to that of IDEXX, having fallen 1.3% in the year so far, but gained 18.2% over the trailing 12 months.

The best-performing stock in FIW’s top-ten holdings is Evoqua Water Technologies Corp [AQUA], which accounts for 3.89% of AUM. Evoqua is a water treatment company, which FIW’s second-largest holding, Xylem [XYL], announced it will be acquiring for $7.5bn on 23 January.

Evoqua’s share price has gained 22.4%, driven by a 15.2% gain on the day of the announcement. Xylem’s share price had an opposite trendline, falling 7.1% year-to-date and 7.9% on 23 January.

Untapped potential, or draining resources?

Water is often seen as a socially and environmentally responsible investment, but Alice Ross, author of Investing to Save the Planet, recently argued that it is “​​dubious whether many water funds really address the UN goal of clean water and sanitation for all”.

Many such funds, Ross argues, are at best “tamely addressing [water security] for the developed world”.

Besides Sokoloff, one of the best-known water investors is Michael Burry, founder of Scion Capital, who became famous for betting against the US economy ahead of the subprime mortgage crisis—as was later dramatised in the 2015 film The Big Short.

Burry himself invests in water via food production, one of the most water-intensive industries and “least contentious” ways of investing in water, according to a 2015 interview with New York Magazine. By investing in almonds grown in non-drought-affected areas that are then shipped to drier regions, for example, Burry believes he’s found a simultaneously profitable and sustainable way to redistribute water.

Analysts polled by Refinitiv yield a consensus 12-month price target of $550.00 for IDEXX Laboratories, $244.00 for IDEX Corp, and $121.00 for Xylem, implying gains of 17.5%, 8.5%, and 18.2%, respectively.