Water Stocks: Investing in the Stuff of Life

A 2008 study by the Center for Strategic and International Studies estimated that by the year 2030, the number of people living in “water-stressed countries” would reach 4 billion—roughly half of total global population.

Consider the extent and ferocity of wars fought over energy supplies or other economic resources in the past, and then contemplate what might happen if the resource at stake were one that every human must have to live. Consider next that despite the vast amount of water on earth, 97% is saline and unusable, and only about a third of the remaining 3% is easily accessible.

The potential repercussions make arguments about “peak oil” and debates over expanded exploration and drilling pale by comparison. The scarcity (or even perceived scarcity) of any resource enhances its value. It stands to reason, then, that any company involved in finding ways to increase the available water supply is potentially sitting on a goldmine.

You might assume that “water stocks” translates to water utilities, but while those are certainly a starting point, the truth is much more complex. In fact, as CNN reported in early 2011, the U.S. water infrastructure is crumbling and in desperate need of repair.

Meanwhile, Americans are so accustomed to cheap water that it is virtually taken for granted, meaning the substantially higher user fees needed to repair and properly maintain the system would probably meet widespread opposition. Taken together, those two facts don’t bode well for water utilities over the long term.

More promising companies in the water sector are involved with filtration and purification, flow management (pumping), and irrigation technologies. Look for the companies that are doing something new, though not every player in this sector is a brash young startup—venerable stalwarts like GE (GE) are active as well.

As you read the introduction, it might have occurred to you that a long-lasting solution would be to do something with that 97% of the planet’s water that is found in the oceans. Desalination is certainly an option, though it has long been inefficient and expensive, used mostly by wealthy desert nations like Saudi Arabia.

However, costs are coming down, though the market is still concentrated: as of 2010, over 65% of the market for reverse osmosis membranes (reverse osmosis is the favored desalination technology) belonged to just three companies.

Pike Research predicted in 2010 that worldwide, desalination investment would double from $8.3 billion that year to $16.6 billion by 2016. While those are still fairly paltry numbers in the grand scheme of things, the fact remains that the pace of growth is formidable.

Moreover, bear in mind that while desalination is used most widely in the Middle East and North Africa, it has attracted strong interest from industrialized countries like Australia (which is mostly desert in its interior) and the United States (where the arid southwestern regions are seeing unflagging population growth and recent droughts quickly produced spats among Georgia, Alabama, and Florida over water supply issues).

Make no mistake: when it comes to an issue like water that is literally a matter of life or death, both consumers and governments will be quick to throw money at solutions should a crisis begin to develop. Though governments are not known for their foresight and proactivity, many do recognize that water problems will only get worse, not better.

Even the U.S. Department of Defense now factors into its contingency planning the fact that conflict over limited water is likely to be the driver of many future wars, especially in parts of the world that are already unstable.

If investment in water interests you, you can certainly research individual companies with exposure to this sector. Conveniently, there are also ETFs available that will enable diversified exposure. Three of the best-known are the Palisades Water Index (ZWI), the Dow Jones U.S. Water Index (DJUSWU), and the First Trust ISE Water Index (FIW). All three offer broad exposure of the type discussed earlier (filtration, pumping, and irrigation) and can be part of a water investment strategy.