Water is an essential element for life, how to invest in it?
Water is, together with oxygen, the most important raw material on the planet. It is the basic principle for life to exist and has always been considered an inexhaustible good. However, water is a scarce commodity with a growing demand. For this reason, more and more investors are considering investing in it. Some ways are controversial, but others could help make it more accessible to everyone. In this article we look at all the ways to invest in water.
Many of us take drinking water supplies to our homes for granted, despite the occasional dry spell. It seems that water is something that we were never going to have to worry about.
In addition, looking at a globe we can see that 70% of the surface of our planet is covered with water. However, only 2.5% is fresh water, which is what we need. And of that 2.5%, the vast majority (99%) are trapped in glaciers and mountains. In the end, we have 0.007% of the total drinking water available for the 7 billion people who live on Earth, which in 30 years will be 10 billion.
According to a UN study on scarcity, water consumption has grown twice as fast as population in the last century, and will continue to do so. They consider water scarcity as one of the main problems of humanity, not because it is not enough, but because it is poorly managed and distributed. Therefore, investing in companies that manage water to make it more accessible to all may be a good option. We cannot underestimate our most elemental good.
As we have mentioned in several articles, when investing our money it is very important to diversify into different types of investment. One of those types is raw materials or commodities, which are an alternative type of asset.
When it comes to commodities, it usually refers to materials such as gold, oil, gas or wheat. But you never talk about water. The raw material par excellence. Many consider water as the raw material with the most potential on the planet.
By way of comparison we can look at oil, we all know the exponential increase in its price in the last century. This happened because oil was considered an essential element for the economy of the countries. Well, water is not only essential for the economy, but it is an essential material to house life. And it is one of those raw materials that we can invest in. Although fortunately you cannot invest directly in it, which prevents speculation about water and the disastrous consequences that this would have.
And then we store water at home? Not exactly, what you can do is invest in water rights, invest in water-rich lands or in water supply or treatment companies. We are going to analyze these three options individually.
1. Invest by buying water rights
A right over water (or springs) gives its buyer the right to use that water source (a river, well, or ditch for example). The right itself has no value beyond the profit that can be made by renting or selling it later.
When an investor buys rights to springs, he can rent them to someone else or he can sell them later at a higher price. There is no broad market for these rights. These are usually transferred between farmers and occasionally an investment fund buys them to invest in them. Of course, like any other good, its price is governed by the law of supply and demand.
On the other hand, most governments prevent (thank God) speculation with water rights, so it is not possible to buy rights that easily, but a plan must be demonstrated to benefit from its use. The purchase of water rights therefore raises the question, should anyone be able to buy or sell rights to such an essential human right for life?
For an average investor, it does not make sense to invest in rights over springs, but there are other more feasible and ethical options, as we are going to see.
2. Invest in land rich in water
The transport of water has been one of the great concerns of humans since the first settlements. The Romans built large aqueducts to carry water where it was needed.
Large-scale water transport has many problems; the cost of construction and maintenance of the infrastructures, the damage to the environment of the same or the practical impossibility of moving it too far, among other things.
And how would it be feasible to transport that water?
Through food. To produce a cup of coffee, 150 liters of water are needed and a single slice of bread requires 40 liters of water. The next time you have breakfast that remember the amount of water you have consumed. National Geographic made a list of 34 everyday products and the water they need.
One of the great well-known investors in water, Micheal Burry, famous (despite himself) for the movie “The big short”, stated the following in 2015 regarding investing in water:
Water transportation is not practical for political or physical reasons, so buying water rights makes sense to me… my conclusion is that food is the way to invest in water. That is, growing food in water-rich areas and transporting it for sale in water-poor areas. This is the least debatable method of redistributing water, and one that can ultimately be profitable, ensuring that this redistribution is sustainable. A bottle of wine needs more than 400 bottles of water to produce - the water in food is what I found interesting. I believe that productive lands with nearby water will be worth a lot in the future.
By doing some research it can be seen that their investment has been based mainly on the California almond, which produces more than half of the world's nut production. In other countries with similar conditions, such as Spain, the presence of almonds is increasing.
Between the droughts they are suffering on the American west coast and the large amount of water that the almond tree needs to survive, farmers are drilling deeper and deeper to obtain water from underground wells. That's where Burry's vision is. With a growing demand for almonds, land with better access to water will have lower costs and will be more profitable, therefore will have more benefits and will be a good investment.
Still, investing in land rich in water is not available to anyone either, so we are going to explain another option for investment in water. Through companies that treat water.
3. Invest in water-related companies
In this way, we will invest in companies that treat drinking water. As we have seen at the beginning, the entire planet needs better infrastructure to manage water. Even the most advanced countries use old infrastructures that need to be renovated.
Better sewage networks, pipelines and treatment plants are needed. In some countries the possibility is even being considered of privatizing water companies to improve their management.
One way is to invest directly in shares of companies that are dedicated to water treatment. Like American Water Works and Aqua America in America or Fluidra and Veolia in Europe.
But undoubtedly the best way to invest in water companies is to do it through company indices or ETFs. Thus, in addition, we will diversify among all companies dedicated to water treatment.
Investing in water through indices
There are two main indices on companies engaged in drinking water treatment:
- S&P Global Water Index: Formed by the 50 most important companies in the world that are in charge of water treatment. It was founded in 2001 and since then it has obtained an accumulated revaluation of 220%.
- World Water Index: Made up of the 20 largest companies that derive most of their income from water supply, purification and water treatment.
Investing in water through ETFs
The most optimal way to invest, and with a lower risk, is to invest in ETFs. Most of these ETFs on the water, try to replicate the indices mentioned above. The most accessible to the general public are the following:
- LYXOR WORLD WATER
- GUGGENHEIM S&P GLOBAL WATER INDEX ETF
- ISHARES GLOBAL WATER
- POWERSHARES ETF TRUS
- CLAYMORE S&P GLOBAL
- FIRST TRUST ISE WATE
Everyone must know what is their best option to invest in water, taking into account their possibilities, objectives and restrictions. We must understand that it is a very long-term investment, a commitment to the most important and indispensable resource on the planet with a very high expected return. But that, at the same time, should not have a high percentage in our investment portfolio, due to its relationship with the equity market.