Was investing in water ETFs a good idea in 2020?

Investing in water is increasingly popular. Tom Bailey reviews the performance of water-related ETFs.

For several years, investors will have the heard the case for investing in water. The argument usually goes something like this: water is vital for both human life and commercial activity, and economic and business growth relies on a steady stream of clean water.

However, water is becoming increasingly scarce. First, a growing global population and economy adds to demand. On top of that, pollution, ecological damage and climate change threaten clean water supplies. Numerous international organisations have made projections about potential clean water shortfalls likely to hit countries in the near future.

All this, it is argued, makes the water industry a growth industry. As demand for clean water increases in the face of dwindling supply, companies in water-related industries that are able to utilise technology to either better clean or manage water resources should benefit.

Most major index providers now offer an index tracking a basket of such companies, which many ETFs now track. As a result, many have suggested that water-related ETFs are the best way to access this investment theme.

So, what would holding a water ETF in 2020 have done to your portfolio? Overall, water ETFs have done well this year. However, as always with niche and thematic ETFs, it depends on the specific ETF chosen.

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The best-performing ETF was L&G Clean Water UCITS ETF (LSE:GLUG), with a total return of 14.9% (in sterling terms as of 9 December, according to FE Analytics data, as all subsequent returns cited will be). Trailing this was the Lyxor World Water UCITS ETF (LSE:WATL), with a return of 13.5%. In third place was iShares Global Water UCITS ETF (LSE:IH2O), which returned just under 11.2%.

This means that the L&G and Lyxor ETFs comfortably outperformed both the S&P 500 index, which returned 12.4%, and the FTSE All World index, up by just under 12%. The iShares ETF slightly trailed this, albeit by a relatively small amount.

All three ETFs follow different indices, which helps explain the difference in the performance.

The best-performing ETF, L&G Clean Water UCITS ETF, tracks the Solactive Clean Water index. This is a basket of 66 companies involved in the provision of technological, digital, engineering and other water services. As a result, it can be argued that the ETF has more of a tech-driven growth tilt compared to the other ETFs, which could go some way towards explaining its stronger performance.

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The L&G ETF is also equal weighted, meaning that each constituent in its portfolio is held in equal measure. The other two ETFs use the more conventional market-capitalisation weighting measure.

The second-best performer, Lyxor World Water UCITS ETF, is much more concentrated, with just 30 holdings. This may partly explain its outperformance when compared to the iShares ETF, which uses the S&P Global Water index, a basket of 50 stocks.

The L&G ETF was launched in July 2019. Dated from then, it has continued to outperform its rival, returning 24.4% compared to the Lyxor ETF’s 22.5% and the iShares ETF’s 18.6%.

The iShares ETF and Lyxor ETF have longer track records. Over the past 10 years, the iShares ETF has returned investors around 220%, and the Lyxor ETF just over 200%. Both have beaten the FTSE All World’s 180% over the same period.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.