Day by day, Individuals depend on 2.2 million miles of growing old water pipes, some laid earlier than the Civil Struggle, to ship life’s most important useful resource. This huge community is crumbling beneath our toes, requiring over $2 trillion in repairs and upgrades by 2043. But this infrastructure disaster isn’t nearly fixing what’s damaged – it’s about constructing for a future the place three-quarters of Earth’s land plenty have gotten completely drier and excessive climate occasions are the brand new regular.

For buyers, this convergence of pressing infrastructure wants and local weather adaptation creates each accountability and alternative. However with choices starting from targeted water ETFs to broader infrastructure funds, making the proper alternative isn’t easy. This information will enable you navigate the panorama of water infrastructure investing, weighing each the compelling case for sector-specific funding and the sensible challenges that include it.

The Volker Alliance estimates that the states already face an estimated backlog of almost $1 trillion for deferred upkeep and wanted upgrades to public infrastructure. In January 2025, “Not Built for This: The Argument for Infrastructure Investing in an Unstable Climate” highlighted the case for infrastructure investments in your portfolio and the infrastructure funds, each open-end and exchange-traded, that could be value consideration. WABAC, a member of the MFO dialogue group, argued that “any dialogue of latest opportunistic infrastructure funds is incomplete with out mentioning water funds. Begin with PHO or FIW if you’re H2O curious. There are international water funds, however they’ve confronted rougher sledding over the previous three years. You can begin with PIO and TBLU. I’m not good sufficient to think about how they could carry out within the tariff regime promised by our new president.” Since I take our board members’ insights critically, we’re providing this addendum on water infrastructure investing for you.

Water infrastructure consists of ingesting water, wastewater, and stormwater companies. There are two drivers of demand for funding in water infrastructure. First, we’ve allowed our present infrastructure to deteriorate. The American Society of Civil Engineers estimates that US water infrastructure wants, particularly, are big:

In 2024 alone, the projected hole between water infrastructure wants and spending in america shall be $91 billion; by 2043, the cumulative hole shall be over $2 trillion. (Bridging the Gap: The Power of Investment in Water, Could 2024)

By their calculation, totally funding water infrastructure wants would generate “a $4.5 trillion acquire in GDP, the creation of 800,000 new jobs, and a $2,000 annual improve in family earnings.” Water funding automobiles allow participation in a sector the place each $1 million invested creates 10–15 jobs whereas addressing existential local weather dangers

Second, water-related infrastructure investments have gotten more and more vital as local weather instability intensifies water shortage, flooding, and ecosystem degradation. A sobering report launched in December 2024 finds that “human-driven local weather change is resulting in a everlasting state of elevated dryness on 77.6% of the Earth’s land plenty, a gentle desiccation that has been taking part in out over the 30-year interval from 1990 to 2020” (“Three-Quarters of the Earth Has Gotten Permanently Drier,” Time, 12/10/2024 reporting on the UN Conference to Fight Desertification, The Global Threat of Drying Lands, 12/2024). This isn’t discussing drought, which is momentary. It’s documenting a everlasting change within the water cycle. Within the US, the arid zone is shifting relentlessly eastward “with no end in sight” based on scientists from Colorado State and the College of Michigan. Aridification is threatening meals safety, whereas excessive rainfall occasions are growing in frequency and depth. These traits are usually not hypothetical, they’re occurring now, and so they demand sensible options. Investing in water infrastructure is about adapting to those realities, no matter their trigger. It’s about defending communities, economies, and the atmosphere from the challenges we already face.

Infrastructure investments help local weather resilience via improved water administration techniques, sustainable applied sciences, and pure infrastructure options like watershed restoration. Monetary devices like water-focused mutual funds and ETFs provide buyers publicity to this important sector whereas contributing to long-term environmental stability.

Position in Local weather Resilience 

Water infrastructure investments handle three key local weather challenges: 

1. Adaptation: Supporting applied sciences like good water techniques and desalination crops
2. Threat Mitigation: Restoring floodplains and wetlands to scale back catastrophe impacts
3. Sustainability: Funding utilities and firms enhancing water effectivity and recycling

These investments align with international priorities to modernize growing old techniques. Two questions stay:

1. Does it make any sense to put money into a water fund, versus a broader infrastructure fund?
2. If it does make sense for you, which choices may align along with your targets?

Selecting broad or slender

Every part above helps investing in water sources, which undeniably profit from long-term tailwinds. Nonetheless, there are two parts of a case towards them.

First, buyers misuse thematic funds. Jeff Ptak is the newest in an extended line of Morningstar analysts to evaluate the efficiency of thematic / sector funds as a gaggle. Mr. Ptak checked out two metrics: (1) the timing of investor strikes into thematic funds and (2) the efficiency of these funds over the three years ending November 30, 2024. The outcomes weren’t fairly:

What I discovered is that, over these three years, the common greenback invested in thematic funds misplaced round 7% per yr. Even once you take away the biggest thematic fund―ARK Innovation ETF, which famously soared, gathered billions in property, after which fell like a stone―these funds nonetheless misplaced nearly 6% per yr in dollar-weighted phrases. To place that in perspective, the S&P 500 gained greater than 11% per yr over that span. (“What Does it Cost to Be Entertained By Your Investments? Try 14% a Year,” Morningstar.com, 1/15/2025)

The issues had been manifold: the funds’ efficiency sucked, they cost loads and buyers mistimed purchases. We, as a gaggle, purchased funds in areas that the analysts (and shills) had been hyping. Ptak’s suggestion: if you wish to put money into a sector fund, choose the realm that Wall Road has written off for useless. With annualized returns, for the water funds beneath, -2.5% to three.2% over the previous three years, possibly water qualifies?

Second, broader funds may get you there with much less fuss. Water funds are inclined to give attention to smaller, high-growth corporations which usually don’t pay dividends. Meaning they are typically extra risky and, therefore extra more likely to scare off buyers than the common fairness. Different locations the place water investments lie, albeit in restricted amount, are infrastructure and utilities funds. The typical infrastructure fund presents 5-15% publicity to water infrastructure investments. The typical utility fund is about 3% “pure” water and 22% diversified utility corporations which might seemingly have water infrastructure of their portfolios.

5-year snapshot, three peer teams, and three high performers

The water group consists of the water-centered funds and ETFs beneath, whereas infrastructure and utilities are Lipper peer teams. Inside every group, we picked our top-ranked Nice Owl fund or greatest performer to assist reply the query, how good can it get?

Collectively, water funds outperformed each infrastructure and utilities, however with considerably extra volatility (measured by the funds’ most drawdown over the interval and by their customary deviation). In risk-adjusted phrases, the image is muddled: water had the next Sharpe ratio (which is sweet) but additionally the next Ulcer Index (which is dangerous, with greater Ulcer scores translating to deeper and longer drawdowns therefore extra ulcers). Utilities predictably threw off extra cash.

Selecting a water fund

We used the MFO Premium screener to establish all funds and ETFs older than three years with “water” of their names (then threw out those the place Water was simply a part of the advisor’s identify).

Constancy Water Sustainability doesn’t but have a five-year report however has considerably outperformed the S&P World Water index of the previous 1- and 3-year durations.

• FLOWX emerges as a top-tier actively managed fund, providing sturdy returns, ESG alignment, and international diversification. It could be a compelling alternative for buyers prioritizing sustainability and keen to pay barely greater charges for energetic administration.
• PHO and FIW stay the leaders by way of uncooked efficiency and cost-efficiency, making them superb for buyers searching for low-cost, U.S.-focused publicity to the water sector. (Which WABAC already tipped us off to.)
• CFWAX and EBLU proceed to be sturdy ESG-focused choices, however FLOWX’s barely greater returns and comparable risk-adjusted efficiency make it a aggressive various.
• AWTAX and PIO stay stable decisions for international publicity, although they lag barely behind in efficiency in comparison with FLOWX and the U.S.-focused ETFs. It’s exhausting to venture what impact Mr. Trump’s numerous impulsive rulings could have on international buyers.

Backside Line

When choosing water-oriented funds, you’ll need to contemplate components equivalent to administration model (energetic vs. passive), geographic focus, and ESG alignment. Actively managed funds like FLOWX may provide greater returns however include greater charges, whereas passively managed ETFs like PHO and FIW present cost-effective publicity to the water sector.

In conclusion, water-related mutual funds and ETFs play a vital position in infrastructure portfolios, providing resilience, progress potential, and alignment with sustainability targets. As local weather instability continues to form international markets, these investments present a compelling alternative to deal with one of the crucial urgent challenges of our time.