It’s about time the rest of us woke up to a very serious problem in California. For one, it’s a problem that likely will affect all of us at some point … but it’s also a potential investment opportunity in an otherwise dull space.
While those of us in the East and Midwest have been dealing with a snow-filled winter, California has remained in a prolonged drought. As in, a four-year drought. In fact, we’re at the point where simply more rain won’t solve what’s going on.
According to NASA scientist Jay Famiglietti, there’s about a year of water supply remaining in the state’s reservoirs. And to make the situation more dire, California’s strategic backup supply of groundwater is dramatically shrinking.
The Golden State is between the proverbial rock and a hard place. California is the most populous state at nearly 39 million people. There are just too many people who are relying on a rapidly shrinking and very limited amount of water.
Where the rest of us should start caring is when you realize California’s role as an agricultural producer. David Weidner writes for MarketWatch:
“… California is also the biggest farm state in the nation, producing more than Iowa, Nebraska and Minnesota combined. Farmers are in the same tough spot. They’ve been ordered to cut the usage of surface water by 80% to 100%. So they’ve been pumping out the once-vast store of underground water, which is causing environmental havoc.”
Drought is not just a California state of emergency — it’s an American agricultural crisis. Water has now become the most essential commodity in the western U.S.
And more troubling: This scenario won’t be isolated to America.
World Water Day and the 2015 World Water Report
The United Nations held its annual World Water Day on March 22. (That one of the world’s leading organizations believes it’s necessary to have day devoted to water should raise alarms.) The day prior, the U.N. released its 2015 U.N. World Water Assessment Programme report, which found that if the world continues on its current path of water usage, California’s predicament will be seen in other areas around the globe.
One of the major drivers is strong income growth and rising living standards worldwide.
Typically, Wall Street loves to hear about growing economies because it exudes investment opportunity. However, this type of population expansion — especially in middle classes, where there’s not just more direct water use, but also in the production of goods they consume — puts a huge drain on resources. All told, the report says the need for water usually increases at double the rate of population growth.
And the world’s population is expanding: According to the report, Earth’s population will increase from 7.2 billion currently to 9.1 billion in 2050.
Other issues include urbanization, as city residents tend to use more water, and the increasing need from farmers to tap groundwater supplies, which in turn further strains resources.
Play the Trend With Water ETFs
As you can see, the problem is big and getting bigger — it’s not just national, but eventually international.
Investors could try to game the likely trend of water scarcity through individual stocks such as water utilities or companies that produce water-preserving technologies. But I like ETFs to make a broader bet on this issue.
For a purely domestic play, look at PowerShares Water Resources Portfolio (NYSEARCA:PHO). PHO is the largest of the water ETFs with nearly $860 million in assets. The ETF is designed to follow an index that primarily tracks companies that make products centered around water conservation and purification. Top holdings include companies such as Roper Industries, Inc. (NYSE:ROP), Flowserve Corp (NYSE:FLS) and Pall Corporation (NYSE:PLL). Expenses are 0.61%, or just $61 annually for every $10,000 invested.
If you’re intrigued by the U.N.’s report and are looking for a global play, there’s the Guggenheim S&P Global Water ETF (NYSEARCA:CGW) that focuses on 50 global companies that specialize in water-related business activities. The vast majority of the CGW is weighted in industrial stocks such as Pentair plc (NYSE:PNR) and utilities such as American Water Works Company Inc (NYSE:AWK). CGW charges 0.65% in expenses.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.
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