These 3 Water ETFs Could be Quiet Winners From Infrastructure Spending

Key Points

• Rising data center water usage is straining infrastructure, creating capacity challenges and investment opportunities across the broader water industry.
• Water-focused ETFs such as FIW, PHO, and CGW offer investors diversified exposure to utilities, infrastructure, equipment, and materials companies tied to water demand.
• Each fund carries trade-offs, including niche focus, concentration in top holdings, and expense ratios ranging from 0.50% to 0.59%, that investors should weigh.

Data centers receive sharp criticism for their high water usage, but the impact on the broader water industry and for investors is also about infrastructure bottlenecks, regulation, and emerging technologies, among other things. Utilities companies must navigate significant changes when hyperscalers enter their territory—in some cases, a new data center operator may immediately become one of the largest customers in the region. All types of water infrastructure providers, from treatment plants to pipeline operators to storage and more, face new capacity challenges.

The landscape is shifting quickly as regulation struggles to catch up with new investments and new companies, and even geographies emerge as potential winners. For investors, one of the safer ways to approach the water industry in the time of AI is via exchange-traded funds (ETFs), which may help to distribute some of the risk and provide broader access to the sector. However, not all water ETFs are the same, and investors might start their search with proven winners like the funds below.

A Play on Potable and Wastewater Remains Niche for Now

A modified market cap-weighted fund, the First Trust Water ETF NYSEARCA: FIW has a special focus on the potable and wastewater industries. Companies in the portfolio must be of a sufficient size and must have adequate liquidity, among other factors. The result is a streamlined basket of around three dozen stocks with no single name accounting for more than about 5% of the portfolio. Despite its relatively niche approach, therefore, FIW is not as highly concentrated as investors might expect.

Potable water and wastewater may not seem like exciting areas of investment, but these spaces could become increasingly important globally as climate change, shifting populations, and other stressors put strains on existing systems. Data center usage may exacerbate or accelerate the issue.

Still, for now, FIW is a specialized fund with a fitting level of engagement among investors: it has an asset base of around $1.8 billion and modest trading volumes, on average. Because many of the holdings of this fund are in the utilities sector, which is known for dividends, the fund does pay a dividend yield of 0.72%. Still, the fund's year-to-date (YTD) performance has not matched the broader market, and given FIW's 0.50% expense ratio, this may be a dealbreaker for investors who do not anticipate water industry spending to increase.

A Generalized Water Fund, But Investors Should Watch for Diversification and Fees

The Invesco Water Resources ETF NASDAQ: PHO is the largest and most heavily traded fund on this list, although its assets under management (AUM) still hover at around $2 billion, and its average trading volumes are modest compared to many funds in other areas. One reason for the appeal of PHO is that it takes a generalist approach, including many different types of water industry companies. Investors can use this for easy access to water utilities, infrastructure, equipment, materials, and many other types of firms.

That said, PHO is not the most diversified fund, with only 40 total positions in its basket of U.S. equities. This means that a handful of companies, including Ecolab Inc. NYSE: ECL and IDEXX Laboratories Inc. NASDAQ: IDXX, carry mid- to high-single-digit allocations, leaving the fund heavily exposed to a relatively small group of companies. The top 10 positions represent well over half of invested assets, making PHO susceptible to volatility in its biggest names. On top of this, the fund has a relatively high expense ratio of 0.59%, which may dissuade cost-conscious investors.

Another Broad Option, But Concentration Remains a Concern

Coming in just one basis point cheaper than PHO, with an expense ratio of 0.58%, is the Invesco S&P Global Water Index ETF NYSEARCA: CGW. This fund also has a broad approach within the water industry, including a variety of companies dealing with infrastructure, utilities, equipment, materials, and more. Its portfolio is broader than PHO's on the one hand, with 67 positions. However, the largest few stocks making up CGW's collection also have high allocations of just under 8% each, so concentration may be a determining factor for investors.

With a dividend yield of 1.52% and YTD returns better than both of the ETFs above, CGW may appeal based on its recent performance in particular. Still, like the other funds on this list, CGW is likely to be most attractive to investors expecting that shifting demand and usage trends for water will contribute to more business for companies already involved in the industry.