Editor’s Note: This article is part of InvestorPlace.com’s Best ETFs for 2019 contest. James Brumley’s pick is the Invesco Water Resources ETF (NASDAQ:PHO).
All in all, the Invesco Water Resources ETF (NASDAQ:PHO) got 2018 started on a solid enough foot. As of the middle of September it was up roughly 7%. That slightly trailed the S&P 500’s performance by that point … but even as necessary as water is to maintain human life, it’s still just water.
And then came October. What was bad for the broad market was even worse for PHO, upending my reasonably decent performance in the 2018 Best ETFs contest. A. O. Smith (NYSE:AOS) gets a big chunk of the blame, down 30% year to date. Though it only makes up a small piece of the ETF, rising costs and foreign exchange headwinds led to a lackluster Q3 report, which took a huge toll on shares. Related names readily followed that lead.
Still, while a few too many of the fund’s constituents have been struggling of late, I’m sticking with the Invesco Water Resources ETF as my top risk-adjusted ETF pick for 2019. The underpinnings are still too compelling, and too inescapable.
Those Compelling, Inescapable Underpinnings for the PHO ETF
The statistics are staggering.
Every year in the U.S., we collectively waste 900 billion gallons of water just due to household leaks. It’s not just individuals though. Water utilities are wasting it too. There are roughly 240,000 water main breaks every year, spilling more than two trillion gallons. And on other fronts, inefficient dishwashers and washing machines use far more of the water that gets to them than they should. Never even mind what’s happened in Flint, Michigan, although that’s hardly a unique situation.
Nature isn’t cooperating either. The Colorado River is starting to dry up in some places, and Lake Mead in Arizona — which supplies water to 22 million people — could be dried up in the 2020’s.
More and more residents of the United States are nearing a clean-water shortage crisis, with most of them not even realizing it.
If we’re going to fix it, the nation will need to spend more than $1 trillion on water infrastructure alone over the next 25 years. That’s in addition to the replacement of appliances that consume more water than they need to. New piping to and in people’s home will only help. All of it translates into opportunity, and the Invesco Water Resources ETF is (still) the easiest way to tap into it.
The Invesco Water Fund is a relatively top-heavy fund, meaning though it has got 35 constituents, the 10 biggest holdings make up more than 60% of the fund’s value. The five biggest holdings account for more than 40% of the portfolio’s total value.
It’s a two-edged sword, and admittedly somewhat negates the diversification purposes of an ETF. Nevertheless, the fund’s biggest holdings really are the ideal way to plug into the potable water problem.
Take, for instance, Ecolab (NYSE:ECL) … the fund’s largest position right now. Ecolab offers industrial and institutional scale solutions that its water conservation, treatment and sanitization customers desperately need. Waters (NYSE:WAT), currently PHO’s second-biggest holding, specializes in water testing. Danaher (NYSE:DHR) makes a myriad of environmentally minded testing and treatment products. Roper Technologies (NYSE:ROP) makes industrial-scale water pumps.
These are the best ways to tap into the water problem most consumers and investors in the United States still don’t fully appreciate. And for what it’s worth, all four of the aforementioned companies as well as A. O. Smith are on pace to drive revenue growth this year, and follow-up with more revenue growth next year. Ditto for earnings.
None of that expected growth is red-hot screaming growth. What PHO lacks in sexiness, however, it makes up for in reliability. Their customers can’t exactly not buy their products just because we’re pushing through a little economic turbulence.
Barring a miracle during 2018’s proverbial two-minute warning, my ETF pick isn’t going to win this year’s Best ETFs Contest. Nevertheless, I’m going to make it my 2019 entry into the same event, this time with an even more strategic mindset.
Like it or not, the best place to be in the midst of a bear market or in the throes of a recession is on the sidelines; not even PHO will be able to resist the tide of a decidedly ugly pushback.
Inasmuch as I have to make a pick headed into what will look and feel like an economic slowdown, though, I can see the Invesco Water Resources ETF being a name sought out for its balance of growth and stability — a not-too-hot, not-too-cold kind of play. It’s a chicken’s approach, but not knowing what 2019 is apt to have in store, it’s an appropriate balance of growth potential and reliable value.
Besides, sometimes it’s the most boring investments that bear the most fruit.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.