Water Stocks To Follow in 2024

As we close the chapter on 2023, the stock market landscape presents a markedly different picture compared to the previous year. This year’s market dynamics have been a rollercoaster, challenging even the most seasoned investors. Unlike 2022, which saw significant downturns in critical sectors, particularly in technology, with heavyweights like Tesla, Meta, and Amazon experiencing notable declines, 2023 has written its unique story. The tech-heavy Nasdaq Composite was up 43%, along with broader indices like the S&P 500, up more than 24%, and the Dow Jones Industrial Average, up 13.7%, have navigated through a complex web of economic factors, each reacting in its distinct way. Our focus remains on water stocks. Consistent with our long-standing premise that water-related investments tend to hold their ground even when other sectors falter due to the essential nature of this resource, we’re set to delve into how our portfolio of water stocks fared in 2023, building on our 13-year history of tracking this segment.

Veles California Water Index – NQH2O

NQH2O

Reflecting on the performance of the California water index this year, we observe a notable shift from its previous trajectory. Last year, the index was riding a wave of substantial growth, boasting an impressive 81% gain over two years. This year, however, the index’s journey has been less exuberant, as it currently stands at less than 200, a descent from its previous high of over 1000. This decrease represents a significant shift in the market dynamics affecting the water sector, particularly within California’s primary water regions, which the index tracks through rights, leases, and sales transactions.

This downturn can be attributed to climate impacts on water resources and broader economic trends influencing investment in utilities and natural resources. While the decline might initially seem disheartening, especially after the remarkable gains of the past two years, it’s crucial to view it in the context of the long-term nature of investing in essential resources like water. The fluctuation in the index is a reminder of the inherent volatility in the stock market, even in sectors as critical as water. For investors and analysts following our index of water stocks, this change signals an opportunity to reassess strategies, analyze the underlying causes, and recalibrate expectations for future performance in this vital sector.

American Water Works Co. Inc. (NYSE: AWK)

AWK

The stock’s long-term performance remains commendable despite American Water Works Co. Inc. (AWK) experiencing a 16% decline in 2023. Over the past six years, including this year’s dip, AWK has demonstrated resilience and a strong market presence in the utility sector, known for its conservative investment approach. Serving an essential need—water and wastewater services to millions—AWK’s position as a leading performer in your water stock portfolio underscores the robustness of investments tied to fundamental human necessities.

Aqua America Inc. (NYSE: WTRG)

WTRG

The stock of Aqua America, now known as Essential Utilities, faced a 23% decline in 2023; this is in addition to the 9% drop observed in the previous year, which followed a profitable period where the stock appreciated 10%. Over five years, including the fruitful phase and the recent downturns, the company has seen an overall gain of 13%. Essential Utilities, serving a solid customer base across multiple states, remains a significant entity in the utility sector.

California Water Service Group (NYSE: CWT)

In 2023, California Water Service Group experienced a 16% retreat, diverging from the prior year’s impressive ascent. The utility company, with operations spanning several states, including areas frequently challenged by drought conditions, has navigated a 45% rise over the preceding five-year span. This year’s performance downturn reflects the often unpredictable swings in the utility market, impacted by various factors such as environmental, regulatory, and economic changes. Despite this, the company’s extensive reach in critical states and its role in providing an essential service underscores the potential for resilience and growth.

American States Water Company (NYSE: AWR)

AWR

American States Water Company, enduring a 16% decline in 2023, faced headwinds from its previous year’s 6% decline. This was a $65 stock five years ago and has traded about 100 in 2022. The company’s established presence and diversification across the United States suggest underlying strengths that could bode well for future resilience. The essential nature of its services coupled with a diversified portfolio often positions a utility such as American States Water Company to weather the cycles of market volatility and maintain a long-term perspective for steady growth.

Exchange-traded funds or ETFs

Another option to invest in water is Exchange Traded Funds (ETF). Think of an exchange-traded fund as a mutual fund that trades on a public exchange, like the New York Stock Exchange. You get the diversification of a fund with the added benefit of the liquidity of a public exchange. Below is the past performance of a few of the popular water ETFs we have been following:

Invesco Global Water ETF (PIO)

PIO

The Invesco Global Water ETF made a splash in 2023 with an impressive 19% uptick. This rebound is particularly noteworthy considering the ETF’s previous year dip of 20%, despite a 23% climb the year before. The performance marks a significant turnaround and reinforces the fund’s almost 70% gain over the prior five years, highlighting its potential resilience and growth within the sector focused on potable water providers. This resurgence reflects investors’ increasing recognition of the value in water resources and infrastructure, signaling confidence in the water industry’s prospects. The ETF’s recovery underscores the importance of potable water companies and the investment community’s response to global trends emphasizing sustainability and essential services.

Power Shares Water Resources Portfolio (PHO)

PHO

In 2023, the ETF, which zeroes in on companies that supply potable water, saw a resurgence, climbing over 15%. This uptick marks a positive shift from the previous year’s 20% decline and further builds on the more than 100% growth achieved over the preceding five-year period. This rebound highlights the ETF’s resilience and the growing investor interest in the water sector, often seen as a defensive play in times of market uncertainty. The latest upswing in the ETF’s performance could be linked to heightened global awareness of water’s critical importance, potentially increased infrastructure spending, and a general trend toward sustainable investing.

Guggenheim S&P Global Water Index ETF (CGW)

CGW

Reflecting on the performance of the ETF that tracks the S&P Global Water Index, we observe a positive trend in 2023, with an increase exceeding 10%. This growth is particularly significant considering the fund’s decline of 18% the previous year, which followed a substantial 28% gain in 2021. Over a five-year horizon, the ETF’s value has appreciated, consolidating a total rise of over 67%. This trajectory underscores the strategic importance of water-related investments in the global economy and the resilience of the water sector amidst fluctuating market conditions.

First Trust ISE Water Index Fund (FIW)

FIW

First Trust, known for targeting companies within the wastewater and potable water sectors, has notably recovered this year, appreciating 17%. This uptick represents a significant rebound from last year’s 11% year-to-date decrease and continues to build on the substantial 112% growth observed over the previous five-year period. This is the most significant increase of any of the stocks in the water portfolio for the past five-year period.

The divergent performance between individual water stocks and water ETFs in 2023, where ETFs surged while stocks saw declines, can indicate several market dynamics. Given their diversified nature, ETFs can often provide a broader market exposure, reducing the impact of negative performance from any single stock. They benefit from various water-related companies, including those involved in infrastructure, equipment, treatment, and technology, which may have different growth drivers compared to the more regulated utilities sector many water stocks belong to. Or since their most significant increase occurred during the last two months of the year, the same time the Nasdaq surged, they just got the benefit of money pouring into the sector.

On the other hand, the individual stocks may have been more susceptible to localized issues such as regulatory challenges, rate cases, or region-specific environmental factors like droughts or floods affecting operations and profitability. Moreover, ETFs can sometimes capitalize on broader thematic trends, such as ESG (Environmental, Social, and Governance) investing, which has gained traction among investors increasingly conscious of climate change and sustainability issues.

The water sector presented a mixed reservoir of results in 2023, with the ebb and flow of stock performances reflecting broader market currents and the unceasing importance of water resources. Despite receding to under 200 from its high-water mark of over 1000, the Veles California Water Index signals a market recalibration yet retains its long-term investment significance. American Water Works Co. Inc. (AWK) saw a 16% dip but maintained a commendable long-term presence in the utility sector. Aqua America, now Essential Utilities, experienced a 23% drop, yet its five-year overview still showed a total 13% gain, attesting to its enduring value proposition.

California Water Service Group (CWT) withdrew by 16%, contrasting with its five-year 45% rise, yet its critical service provision across drought-prone states suggests an undercurrent of growth potential. American States Water Company (AWR) faced a 16% downturn, but having traded around $100 in 2022 after being a $65 stock five years ago, its established presence and diverse operations across the U.S. position it for potential future resilience and growth.

In the ETF space, the Invesco Global Water ETF (PIO) surged by 19%, and the Power Shares Water Resources Portfolio (PHO) ascended over 15%, rebounding strongly after the previous year’s declines. Their performances underline the sector’s robustness and the escalating investor interest in sustainable water investments. The Guggenheim S&P Global Water Index ETF (CGW) also saw a surge of over 10%, adding to its cumulative rise of 67% over five years. First Trust ISE Water Index Fund (FIW) outperformed with a 17% growth, marking the most significant increase in the water portfolio for the five years, highlighting a remarkable 112% growth.

These currents suggest that despite short-term fluctuations, the water sector remains fertile for investors, buoyed by the essential nature of its commodities and services and the growing global emphasis on sustainability.

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