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Commodities Corner: How to invest in water as droughts, shortages dominate the news

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Water has become a popular topic these days, given widespread drought conditions around the globe and the water crisis in Jackson, Miss. That doesn’t translate into an automatic win-win when it comes to investing in the sector.

“While the megatrends of water continue to roil the headlines, the investment implications are more complicated,” says Deane Dray, managing director and multi-industry analyst at RBC Capital Markets.

“One of the biggest myths is that all water investments must be winners,” given all the supply-and-demand imbalances, droughts, and clean water fiascos like the one in Jackson, he says. “Too many people think that just being in a water-related business must automatically make it a good investment. That is simply not the case.”

Most water exchange-traded funds were trading lower this year as of Sept. 6, with First Trust Water
FIW,
+1.14%

  down 18%, the Invesco Global Water
PIO,
+1.59%

down 28% and Invesco Water Resources 
PHO,
+1.04%

down 19%. Shares of water technology provider Xylem Inc.
XYL,
+0.46%

have lost 23%, and public utility firm American Water Works Co. 
AWK,
+0.25%

is down 21%.

On the Chicago Mercantile Exchange 
CME,
-0.33%
,
 however, water futures based on the Nasdaq Veles California Water Index traded at $1,165 per 1-acre foot, up about 21% from a year earlier.

Investors have different options for investing in the water industry, “from desalination technology to companies providing water at a municipal level and those transporting water,” says Andrew Chanin, CEO of ProcureAM and issuer of the Procure Disaster Recovery Strategy 
FEMA,
+1.89%
.
There is no one simple solution, so “diversification may be an approach investors consider to tackle the growing water crisis,” he says.

Among investment choices, water futures can help determine if there are concerns over scarcity, Chanin adds. Investment in water ETFs, meanwhile, show an understanding that there is an “imminent crisis and that we are even more reliant on these companies to develop solutions.” And companies providing technology, infrastructure and transport of water, and methods for creating drinkable water, such as desalination, could be “very important during cycles of drought and water scarcity.”

In a striking sign of how dire water shortages have become, the U.S. Bureau of Reclamation reported that the water level at Lake Mead on the Arizona-Nevada border, the largest reservoir in the country, was only 28% full as of Sept. 6.

“We expect the consequences of water shortages to become increasingly apparent…leading to a corresponding increase in demand for companies that support more-thoughtful approaches to water usage,” says Alec Lucas, research analyst at Global X ETFs.

Lucas oversees his firm’s suite of water and clean technology funds, such as the Global X Clean Water
AQWA,
+1.42%
,
which includes “pure plays”—companies that generate at least 50% of their revenue from clean-water industry-related business operations, he says. Those companies include Xylem and American Water Works, as well as water distribution and measurement product maker Mueller Water Products Inc.
MWA,
+1.69%

and water treatment and purification technology developer Ecolab Inc.
ECL,
+1.01%
.

RBC Capital Market’s Dray says there are few publicly traded “pure play” water companies, and while there are over 50,000 water utilities in the U.S., fewer than 10 are publicly traded. That limits investors’ choices in the water sector.

Still, Dray believes Xylem, Evoqua Water Technologies Corp.
AQUA,
+1.88%
,
and Danaher Corp.
DHR,
+0.81%

are “much better positioned be winners” in the higher technology subsectors of water such as smart water systems, automation, water testing, and desalination.

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