Over the past few months, concerns regarding unpredictable tariffs, sticky inflation, and elevated interest rates drove many investors away from macro-sensitive industrial stocks. However, many water stocks bucked that sectorwide downturn.
The reasons are simple: Companies usually won't cut off their water just to save a few dollars, and the market's demand for clean water filtration and processing technologies will keep rising regardless of the economic headwinds. Climate change and growing populations should also continue to reduce the world's supply of fresh potable water.
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That's probably why shares of the Invesco Water Resources ETF (PHO -0.39%), which tracks dozens of companies across the water conservation and purification markets, have risen 315% since its inception on Dec. 6, 2005, and delivered an average annualized return of 8.5%. That might not be as impressive as the S&P 500's average annualized return of about 10%, but this ETF could still turn a modest $1,000 monthly investment into nearly $612,000 over the next two decades.
What does the Invesco Water Resources ETF invest in?
The Invesco Water Resources ETF aims to invest at least 90% of its assets in stocks, American depositary receipts (ADRs), and global depositary receipts (GDRs) held in the Nasdaq OMX U.S. Water Index. The ETF currently holds 40 positions, and it's rebalanced every quarter and reconstituted annually in April. Its top five holdings are Roper Technologies, Ecolab, Ferguson Enterprises, Waters Corporation, and Xylem.
By sector, the ETF allocates 25.9% of its portfolio to machinery stocks, 11.6% to trading companies and distributors, 10.6% to water utilities, 9.5% to building products, and 8.3% to commercial services and supplies.
The rest is split between software, chemicals, life science tools and services, construction and engineering, and electronic equipment and components markets. That diversification makes it a well-balanced play on the water industry as it expands for the foreseeable future. It charges a modest management fee of 0.50% with a total expense ratio of 0.59%.
How can this ETF churn $1,000 into $612,000?
It's impossible to tell if this ETF can replicate its performance from the past 20 years. But the water industry is stable -- so I wouldn't be surprised if this ETF continued to grow at an average annualized rate of 8.5% over the next two decades.
Assuming that happens, and you invest $1,000 at the beginning of every month regardless of the ETF's trading price, you could generate $371,031 in total gains (excluding fees) on top of your $240,000 in contributions. That would equal $612,031.
With consistent monthly investments, you would take advantage of dollar-cost averaging and buy more shares when its price is low and fewer shares when its price is high. That classic strategy should smooth out your long-term returns.
A long-term hedge against inflation
The Invesco Water Resources ETF isn't an exciting investment, but it's an evergreen one that should flourish during bear and bull markets. According to the UN, only 0.5% of water on Earth is fresh and useable, while terrestrial water storage levels (including soil moisture, soil, and ice) are shrinking at a rate of 1 cm per year. Those trends could cause the world's demand for freshwater to exceed its available supply by 40% by 2030, according to The World Economic Forum.
That's why water-related stocks are more reliable hedges against inflation than common commodities like oil and gold. So instead of tracking down individual stocks across this sector, it's smart to invest in this simple ETF and just leave it alone for a few decades.
