Michael Burry Is Investing in Publicly Traded Water Companies — Should You?

You may recall Michael Burry of the Big Short fame, who made a fortune after correctly predicting the 2008 housing market crash. The star hedge fund manager has turned his attention to water. Is water a good investment? What are the best publicly-traded companies for water stocks?

Water is among the most important natural resources. Water is needed almost everywhere from food production to construction and manufacturing. Therefore, the water business is huge and can be highly lucrative for companies involved in it.

Although water is abundant on our planet, only a tiny fraction of it is suitable for consumption. That results in a scarcity of water needed in homes, farms, and factories. With limited supply amid increasing demand, the water business can be highly profitable over time.

Burry chose to invest in the water industry through food-focused farmlands. For example, he reasons that almond farms require a large amount of water. When there's a water shortage, many almond farmers can be forced out of the business. The result is that the almond supply would drop and prices would rise, which would result in higher profits for almond farms that survive. Bill Gates is also investing in farmlands.

For retail investors with little money, purchasing farmlands as a proxy to the lucrative water industry may be out of reach. The alternative option is to invest in the stocks of publicly traded water companies. You may purchase shares in individual companies or buy an ETF that gives exposure to water stocks.

The water business has many roles. There are companies that operate as utilities, supplying water to homes, farms, and factories under regulated prices. There are companies that provide wastewater management services. Other companies may focus on providing water treatment and distribution infrastructure equipment and solutions. These are some of the major publicly traded water companies.

• American Water Works (AWK) is among the largest water utilities in the U.S. and an experienced market participant having been founded in 1886. Although the company’s prices are regulated, it lacks competition in its markets. AWK stock has a long history of consistently paying dividends.

• Essential Utilities (WTRG) provides water and wastewater services. It also supplies natural gas to customers across several states. Therefore, it doubles up as both a water stock and natural gas stock. The company pays dividends.

• Xylem (XYL) provides technology to companies in the water business. Its solutions apply in areas such as water treatment, water transportation, and measurements of water consumption. The company pays dividends and has been distributing increasing amounts over the past decade.

Analyzing and picking individual water stocks can be daunting for some investors. In that case, an ETF that gives you exposure to a basket of water stocks may be a great option. These are some of the water stock ETFs you may want to consider.

• The First Trust Water ETF (FIW) was launched in 2007. The fund tracks 36 of the largest publicly traded water companies in the U.S. It has more than $1 billion in assets and charges 0.53 percent in expense ratio.

• The Invesco S&P Global Water Index ETF (CGW) invests in water utilities, infrastructure, and equipment companies. It has an expense ratio of 0.57 percent.

• The Global X Clean Water ETF (AQWA) is new having only launched in 2021. It invests in companies in the clean water business, ranging from companies doing industrial water treatment to companies providing water storage and distribution infrastructure. It has an expense ratio of 0.50 percent.

Finally, investing in water ETFs rather than individual water stocks may be ideal if you’re looking to build a diversified portfolio. When selecting ETFs, you need to consider how the ongoing annual fee called the expense ratio would impact your returns.