In the pantheon of sectors that can be deemed “glamorous” or even modestly exciting, industrials and utilities usually aren't on that list.
Of course, glamour is in the eye of the beholder, and water exchange traded funds are something to behold this year. Just look at the First Trust Water ETF (FIW), which is up nearly 22% year-to-date on the back of a recent string of all-time highs.
For those needing further confirmation of the intensity of the water equity rally in 2021 should consider that FIW is one of at least three older water ETFs that are up at least 20% year-to-date. In the case of the $1.21 billion First Trust ETF, it's nearly doubled the 2021 returns of the largest utilities ETF while beating the biggest industrial ETF by about 500 basis points. Those are relevant points because FIW allocates 77% of its weight to those two sectors.
Understanding Why FIW's Been Fabulous
For investors new to the concept of water equities and ETFs, this segment is often viewed as an infrastructure play, meaning it's highly relevant in the current environment. In fact, the $1 trillion infrastructure package recently passed by the Senate contains $55 billion in spending for water infrastructure.
Bolstering the long-term thesis for FIW is the fact that, like so many other infrastructure endeavors, the spending included in the aforementioned legislation is much more than a surface scratcher than it is a cure-all. FIW, which tracks the ISE Clean Edge Water Index, could be an ideal play for long-term investors because federal, state and local governments need to spend much more, as in trillions of dollars, on water infrastructure.
“Much of the nation’s critical water infrastructure has reached or exceeded its useful life and warrants significant capital investment,” writes First Trust Senior Vice President Ryan Issakainen. “The American Water Works Association estimates that over the next two decades, most of the nation’s drinking water pipes will need to be replaced or repaired. Moreover, wastewater treatment plants have an average lifespan of 40-50 years, meaning those that were constructed in the 1970s or earlier may soon need to be replaced.”
Let's put it this way: If U.S. was a kid in school, it would not want to take its water report card home to mom and dad. The American Society of Civil Engineers (ACSE) grades U.S. drinking water quality a C- and the water infrastructure grade is worse at D+.
As Issakainen notes, in order to get those grades to the A or B range, a staggering $3.3 trillion will need to be spent on water projects through 2039. Putting $3.3 trillion into context, it's “just” $100 billion or so below the combined market capitalization of Amazon (AMZN) and Alphabet (GOOG).
FIW Long-Term Allure
Unfortunately, the U.S. has a reputation for delaying necessary infrastructure spending. However, as the increasingly dire water situation in the West, including California, confirms, governments can no longer afford to kick the can down the road when it comes to water expenditures.
With some states discussing water rationing, the time to shore up water infrastructure and deploy better use of helpful technology on this front is now. Those factors and more could help FIW live up to what's already an impressive long-term track record.
“Since its inception in May 2007 through the end of the second quarter of 2021, FIW has been an under-the-radar outperformer, beating the Russell 3000® Index by 1.5 percentage points, despite being underweight the information technology sector, which was the best performing broad sector during that time,” adds Issakainen.”The ETF has also outperformed the index over the past 1, 3, and 5 year periods through June 30, 2021.In our view, long-term trends related to water scarcity and the need for large-scale infrastructure investments—as well as several compelling short-term catalysts—may drive growth for the water theme in the months and years ahead. We believe FIW may be an effective tool to capitalize on these trends.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.