CGW: Invest in Natural Resources for the Long Term Through the Invesco S&P Global Water Index ETF
These resources which exist independently of mankind comprise wood, gold, oil, water, and others. As for water, it can also be consumed directly.
Thinking globally, this high growing world requires more and more natural resources with awareness campaigns by conservation groups in various parts of the world making us aware of their importance and scarcity. Now, in economics scarcity is synonymous with value and what we often consider as unlimited and take for granted are in fact limited and highly valuable.
Envisioning this in the case of water, or pure water, which does not contain any pollutants, we can easily see why despite the fact that it is relatively more present than oil or gold, it is still not less valuable as it is essential for our good health.
Now, there are organizations that are in the business of water, whose shares we can purchase through a broker, but there is also the ETF option where the fund managers make a selection of the stocks to include in their portfolio based on specific criteria.
Investing in water
For this purpose, three of the top-performing water ETFs are the First Trust Water (FIW), Invesco S&P Global Water Index ETF (CGW), and Invesco Water Resources ETF (PHO). These funds invest in companies operating in the treatment and purification of water, as well as its distribution.
Comparing their performances for the last one-year, CGW has exceeded its two peers by at least 2%. As for the one-month and three-month periods respectively, the ETF has delivered less underperformance and this shows its ability at better withstanding volatility. Consequently, I proceed with CGW.
This ETF tracks the performance of the S&P Global Water Index, which selects stocks based on operations in the materials, water equipment, utilities, and infrastructure sectors.
A key criterion considered by the fund managers at Invesco for inclusion of a particular stock into CGW includes a market capitalization of at least $250 million. Therefore, the ETF does not solely include large caps like the S&P 500, and it is this exposure to smaller caps that makes it more volatile than the broader market. Some notable names include American Water Works (AWK), Xylem (XYL), and Veolia Environment (VIE FP) a French-based company.
Now American Water Works’ stock which constituted 9.41% of the fund’s total assets as of January 20 has lost nearly 16% of its value since the beginning of this year after being downgraded by Wall Street analysts. On the other hand, CGW has dropped by only 10.5%, and this brings us to the rationale of owning the shares of a company through the ETF formula, which is synonymous with more diversification and fewer downside risks.
Looking ahead, catalysts for an upside are constituted by the infrastructure bill which the U.S. President signed in November. While most people talk about its high-speed internet component, the plan includes significant investments for the water infrastructure or $48.4 billion over five years for drinking water and wastewater spending. Two of the sectors which should benefit from these investments are industrials and utilities which, when combined, form more than 90% of CGW’s assets.
This said, with only 52% of U.S. exposure, the Global Water ETF should benefit less from the infrastructure plan than PHO and FIW which contain relatively more American stocks, but, here, CGW’s broader geographical diversification may prove to be an advantage in 2022 due to more inflationary pressures building up in the U.S. In this respect, the inflation rate in the U.S. is at its highest in the last forty years. Additionally, individual holdings do not weigh more than 10% each signifying relatively fewer portfolio concentration risks.
Analyzing the price action before investing
The ETF reached its highest point on November 19, due to momentum induced by the Infrastructure Bill being converted into law. Its fall from the start of 2022 is explained by the fact that the U.S 10 year Treasury rates have surged and are now at 1.72%. The ETF’s share price is sensitive to the change in interest rates. Thus, CGW (orange chart below) has already undergone a 13% downside and this looks to continue.
However, due to only 5.68% of tech as part of its portfolio, CGW is not prone to be adversely impacted by the tech sell-off to the same degree as the Nasdaq Composite which lost 2.72% of its value on Friday alone and this, in the wake of the Federal Reserve getting more aggressive on monetary tightening.
Source: Trading View
Finally, water is an essential commodity and the ETF’s holdings have a long runway of organic growth due to the continuous increase in usage of water by people on a per gallon basis. There is also the Infrastructure plan and I also see increasing M&A activity in the water industry during the forthcoming years as U.S. states implement projects. Thus, I would advise a buy at the $50 level taking into consideration that CGW pays dividends with a yield of 1.76% which covers the expense ratio of 0.57%.
Disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.