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Will investor funds flow back to the First Trust Water ETF?

The threat of a global shortage in water could boost investor growth in First Water Trust ETF, which has had a turbulent year so far. Fears over a lack of water have escalated so far in 2022 following the Russia-Ukraine conflict, which has raised concerns of a global food crisis that Morgan Stanley says would also lead to water scarcity issues in most regions.

With the UN’s International Resource Panel forecasting global water demand to exceed supply by 40% in 2030, the First Trust Water ETF [FIW] is seen as one of the best ways for investors to gain exposure to the theme.

Growing concerns over the lack of water, both for drinking and local agricultural production, have escalated so far in 2022 amid fears of a global food crisis brought on by the Russia-Ukraine conflict. Morgan Stanley released a report titled A Deep Dive on the Water Crisis on 14 February that sees a food scarcity crisis brewing if water resources continue to be drained.

“Agriculture accounts for about 70% of global water withdrawals, and growing food demands coupled with increased droughts and flooding are likely to intensify water supply challenges in the coming decades,” it stated. 

The firm suggests that significant investment in infrastructure and technology to improve the treatment of existing water supplies will help to ensure they are not literally sent down the drain.

Indeed, it is not just developing nations that are struggling. The American Society of Civil Engineers reported that an equivalent of $7.6bn worth of treated water was lost due to leaky pipes in 2019, with the figure expected to double by 2039 to $16.7bn.

President Joe Biden’s $1.2trn infrastructure bill is set to tackle these issues. The package of measures includes $55bn to upgrade water infrastructure, replacing service lines and pipes, and $50bn to make the system more resilient against droughts and floods.

First Trust Water ETF leaks funds

The First Trust Water ETF, which looks to replicate the ISE Clean Edge Water Index, tracks the performance of companies that derive a substantial portion of their revenues from the potable (safe drinking) water and wastewater industry. Industry exposure includes water distribution, infrastructure (pumps, pipes and valves), water solutions (purification and filtration) and ancillary services, such as consulting, construction and metering.

The First Trust Water ETF’s share price climbed 31.9% in 2021 as water scarcity rose up the ESG agenda. However, it has fallen 18.9% in the first four months of 2022, hit by turbulence in the stock market as interest rates rose in the US and fears of a global economic downturn took hold as a result of the Ukraine conflict.

As of 3 May, the fund has a year-to-date total daily return of negative 16.61%, according to Yahoo Finance, and net assets of $1.3bn.

Out of the fund’s 36 holdings, Roper Technologies [ROP], which makes metering equipment, products and systems, has the biggest weighting with 4.3%. This is followed by metering technology provider IDEX Corporation [IEX] with 4.16% and American Water Works Company [AWK] with 4.16%. It also has a 3.95% holding in water management group Ecolab [ECL].

Shares Roper are down 4.2% in the year-to-date to 29 April close. The stock has been helped by strong forecast-beating Q1 figures showing a 11% rise in revenues and a 6% hike in earnings per share. Shares in IDEX Corporation, American Water Works and Ecolab are also down 19.5%, 18.1% and 27.6%, respectively, in the same period.

Tailwind from rotation to defensive utilities

Tougher economic times could also boost the share prices of water stocks and, in turn, the First Trust Water ETF as investors traditionally turn to defensive utilities during periods of turbulence. That’s because they can hike bills and be assured that demand will continue to follow.

According to a BNK Invest report, analysts are optimistic about a revival in the First Trust Water ETF, boosted by inflation, climate change fears and renewed infrastructure spend. Analysts at the firm have a consensus target price of $98.06 on the fund.

“Population and economic growth, global warming and increasing pollution are putting extreme pressure on the Earth’s clean water supplies,” Seeking Alpha wrote. “The FIW ETF has had a dreadful 2022 so far. However, that could represent an opportunity for investors, considering the fund has an admirable 14.1% average annual return over the past decade.”

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