Why Invest in Water?

Originally published on watercanada.net

Many of my environmentalist friends question whether it’s right to put a price on water. They see water as sacred, and get upset when I talk about it as a commodity.

My standard response? We already have several prices on water, so get with the program.

Of course, we’re not talking about the value of water (that is, of course, priceless). We’re talking about the cost of treating and distributing it. Prices vary within the same city, and the delivery system is a key factor in determining the price. My utility bill here in Toronto shows that I pay $2.7137 per cubic metre (m³). (Funny how we’ve eliminated pennies and the city still charges to four decimal places!) At that price, water just flows and flows when I turn on the faucet or shower. The cost of municipal water delivery works out to $0.12 per gallon (four litres). Alternatively, I have the choice of paying more than $30 per gallon for water if I decide to buy a 600mL bottle for $5 at a Blue Jays game.

Same product, same city. But the difference in price is astounding.

The real price of water has got to be somewhere in the middle. We all know that buying bottles of water at sporting events is a rip-off, and we all know that the price we pay to the city is too low. That’s the reason few people complain when the city raises water bills by nine per cent annually. If that percentage was applied to energy, gas, or food, you’d see Rob Ford blowing a gasket about it on the news. Water is so cheap, however, that barely anyone noticed.

In times of volatility, we’re told to find investments that are “recession resistant.” These investments are usually sectors that are at the base of Maslow’s pyramid. They serve fundamental human needs like food, shelter, gasoline, and water. It makes sense—in tough times, these are the first things that families need. Companies that provide these basic needs will have the most resilient revenues, and prices are hugely inelastic (meaning that people will still buy as much, even if prices go up).

Maybe it’s because pipes are all underground, but water infrastructure something that we completely take for granted. It’s something we’ve neglected, and municipalities are starting to clue in. According to the Federation of Canadian Municipalities, it will cost $80 billion to replace the country’s water infrastructure that is rated as having “fair” to “very poor” condition.  In the United States, the problem is even bigger. The EPA recently said that US$384 billion is needed in the next 20 years. Developing jurisdictions are an even bigger market, with systems being built from scratch.

It’s no surprise that water infrastructure exchange-traded funds (ETFs) have outperformed so many sectors and countries.  Even in this age of austerity, governments everywhere (Montreal and Texas, to name a couple) are still making huge investments. This isn’t sexy stuff; it’s companies producing pumps, meters, and utilities, with a few groundbreakers doing innovative work in areas such as soil remediation and desalination.

First Trust ISE Water Index Fund vs iShares S&P/TSX 60 Index Fund. Chart powered by Bloomberg.

Here’s a list of global water infrastructure ETFs:

 Which ETF do you prefer?  Let me know in the comments below.

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commented 2013-12-30 14:41:22 -0500
Thank you
Don't let your money do things you wouldn't