New York-based Global X has introduced an ETF providing exposure to companies globally that are advancing the provision of clean water.
The fund provides exposure to companies advancing the provision of clean water globally.
The Global X Clean Water ETF (AQWA US) has listed on Nasdaq Stock Market and comes with an expense ratio of 0.50%.
Andrew Little, Research Analyst at Global X, said: “Over a decade ago, the United Nations General Assembly recognized access to water and sanitation as a human right. Despite this, water scarcity and quality continue to threaten economies and lives.
“Given the immediate need to increase global access to clean water and recent advancements in water infrastructure and technology, Global X is leveraging our knowledge of disruptive themes to provide investors with access to high growth potential companies across several aspects of the clean water value chain.”
Investment case
Constituting only 1.2% of the Earth’s surface, clean water is one of the most vital and valuable resources on the planet. Scarcity, sanitation issues, demographic changes, industrial demand, and the climate crisis are all presenting challenges to the global water sector.
According to the UN, four billion people globally experience severe water scarcity for at least one month of the year and 2.3bn people live in water-stressed countries.
Even when available, water is often not clean enough for humans to use. Research from the World Health Organization found that almost a third (29%) of the global population lacks access to safely managed drinking water, while more than half (55%) lack access to safely managed sanitation services. In 2017, unsafe water caused 2.2% of global deaths – more than diabetes, HIV/AIDS, and Malaria.
Areas with sufficient access to clean water are not immune either, often facing challenges with aging infrastructure and a growing need to monitor and treat wastewater.
With access to clean water and sanitation being prioritized through the UN Sustainable Development Goals, and the Covid-19 pandemic placing a renewed focus on public health policies and infrastructure, the Global X Clean Water ETF offers a vehicle to target the companies positioned to benefit from developments in the global water sector.
Index methodology
AQWA is linked to the Solactive Global Clean Water Industry Index from Frankfurt-based index boutique Solactive.
The index is composed of relevant companies with market capitalizations greater than $200 million and average daily trading values above $2m. Constituents may be listed in developed or emerging markets, including Stock Connect-traded China A-shares but excluding India.
Security selection is driven by ARTIS, Solactive’s proprietary natural language processing algorithm. ARTIS identifies firms linked to a specific theme by screening for related keywords in a company’s publicly available documents.
With reference to the water theme, the methodology identifies and selects the 40 companies with the greatest relevance to water treatment, reclamation, purification, conservation, storage, transportation, metering, and distribution, as well as firms that are producing water purifiers and heating products or providing water efficiency consulting services. Eligible companies must generate at least 50% of their revenues from the above activities to be included in the index.
In addition to the methodology’s inherent sustainability approach, the index features an explicit ESG screen for compliance with UN Global Compact principles. Non-compliant companies are excluded and replaced with the next highest-ranking eligible security.
Constituents are weighted by float-adjusted market capitalization subject to an individual cap of 8% and an aggregate cap of 40% on securities with weights greater than 4.5%. The index is reconstituted and rebalanced on a semi-annual basis with buffer rules helping to limit unnecessary turnover.
Two-thirds (65.9%) of the index is allocated to stocks from the US with the next-largest country exposures being the UK (12.6%), China (6.9%), France (4.4%), and Japan (3.6%). The index’s sector distribution is dominated by utilities and industrials which account for weights of 47.6% and 38.9%, respectively.
Notable stock positions include American Water Works (8.2%), Ecolab (8.2%), Xylem (8.2%), Essential Utilities (7.6%), and Pentair (6.0%).
Distributions are sent to investors on a semi-annual basis.
Comparable funds
There are several other US-listed ETFs offering a play on the water theme, derived from either US or global stock universes. Of the global mandates, Invesco‘s $880m Invesco S&P Global Water Index ETF (CGW US) is the largest. This fund tracks the S&P Global Water Index and comes with an expense ratio of 0.57%.
In Europe, the largest global water ETF is the $2.0bn iShares Global Water UCITS ETF (IH20 LN) from BlackRock. It tracks the same S&P index as the aforementioned Invesco fund and comes with an expense ratio of 0.65%.
Also worth a mention is the $1.1bn Lyxor World Water UCITS ETF (WATL LN), at 0.60%, linked to Société Générale’s World Water Index.