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Best ETFs for 2018: Invesco Water Resources ETF is Worth the Wait

James Brumley

This article is a part of InvestorPlace’s Best ETFs for 2018 contest. James Brumley’s pick for the contest is Powershares Water Resource Portfolio (NASDAQ:PHO).

As far as investment returns go, my 2018 ETF pick of Invesco Water Resources ETF (NASDAQ:PHO) has been less than thrilling. The PHO ETF is essentially at a break-even for the year, though that’s not any worse than the overall market’s year-to-date result.

Still, I’m a believer in the long-term opportunity ahead. Clean water remains increasingly scarce, and as the global population continues to grow, demand for that water grows with it. Indeed, the world is moving ever closer to the tipping point in terms of water, with demand on the cusp of exceeding an affordable, accessible supply of it.

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As always, the world will sooner or later pay for what it absolutely has to have.

Ugly Truths

The statistics are staggering. More than 800 million people on the planet don’t have reasonable access to clean water, and one out of three don’t have access to a sanitary toilet. Unclean water claims the life of a child every two minutes.

Don’t be fooled into thinking this is just a third-world problem either. One only has to look at the debacle in Flint, Michigan to realize it can happen right here at home. That debacle has been mostly abated, though to some it’s yet to be fully solved after four long years of fighting.

The sad irony? Leaking pipes and dripping faucets waste an estimated one trillion gallons of drinkable water every year in the United States alone.

To its credit, the world is finally starting to do something about these problems, and the waste. Consumers and governments are putting their money where their mouths are too, though we’ve still only scratched the surface of what needs to be done. The American Water Works Association reckons we’ll need to invest $1 trillion in water infrastructure over the course of the next 25 years to meet U.S. demand alone. The rest of the world is facing similarly-sized bills for their similar crisis.

And that’s why names like Ecolab Inc. (NYSE:ECL) and Waters Corporation (NYSE:WAT) — both constituents of the PHO ETF — have to like what they see in their futures.

They’re Doing Their Part

The Invesco Water Resources ETF may be a lackluster performer so far this year, but not because the companies that make up the fund aren’t succeeding.

Take the aforementioned Ecolab for instance. The company, which makes water-efficient dishwashers and washing machines for institutional-level usage (think hotels and cafeterias) in on pace to grow its top line to the tune of 7% this year, and analysts expect comparable sales growth next year. Earnings are expected to grow at an even faster rate. Waters Corporation, the fund’s biggest holding, is projected to put up similar revenue and income growth this year and next, selling (among other things) water quality measurement wares.

So why the go-nowhere performance from the ETF?

Partly because, in the shadow of geopolitical turmoil, investors have plenty of other things on their mind. Water isn’t sexy compared to the iPhone, or Bitcoin, or taking the temperature of society’s mood via Twitter.


Perhaps more than anything though (and an extension of that lack of sexiness), the water-conservation and water-purification industry is a slow-growth machine, and investors aren’t into playing a proverbial “long game.” These are stocks that have a tendency to lay low for months if not years on end, and then suddenly benefit from the market’s realization of how far these companies have come.

That’s the long way of saying I’ve not given up on the PHO ETF yet, even knowing the second half of the year may not be any more fruitful than the first half has been.

Bottom Line for PHO ETF

That’s not an easy mindset to adopt, or maintain. A frenzied media consistently suggests action is always merited, and that high-growth companies are the only names worth investing in.

Big mistake.

Even with the billions of dollars’ worth of equipment and infrastructure spending on the radar that will coincide with the worsening of the water-scarcity crisis, none of these names will likely every put up heroic returns in any given year. In that the underpinnings are non-cyclical though, investors may find that the slow-and-steady approach really does win the race.

Just don’t get distracted in the meantime.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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