In the 2015 film The Big Short, hedge fund manager Dr. Michael Burry realizes that the mortgage market is about to implode. By the end of the movie, Burry decides to shift his investment focus to one thing: water. If you’re wondering why anyone would want to invest in water, the answer’s pretty simple. Despite the fact that most of the Earth is made up of water, the vast majority of it isn’t drinkable.
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California’s recent drought is a prime example of the fact that the demand for clean water is growing. Investing in water isn’t that difficult, but you’ll need to do your homework first. Here’s a quick guide to help you get started.
Weigh Your Investment Options
There are three basic ways to invest in water: stocks, mutual funds and ETFs. With an individual water stock, you’re buying and selling the stock through a brokerage firm and paying a commission to execute your trades. Certain water stocks give you the opportunity to earn dividends that you can reinvest into additional shares or receive as a cash payout.
Mutual funds are made up of a group of securities in a particular asset class or market sector. They can be actively managed, but passively managed funds tend to carry fewer fees.
Exchange-traded funds correlate to a market index or sector. Exchange-traded water funds are traded just like stocks, but they’re generally more tax-efficient. While some ETFs are more volatile than others, they’re often a solid choice for investors who don’t have a lot of money and don’t like taking on too much risk.
Choose Your Niche
Water investments vary and investors need to understand what the different niches are. For example, some of the divisions you may encounter when researching water investments include water treatment, water rights, agricultural irrigation system manufacturing and water pipe manufacturing.
Water utilities is another market segment that has the potential to generate some decent returns. Water utility companies often hold a monopoly in their particular area, with larger companies absorbing smaller ones. Knowing what niche you want to put your money into is just as important as choosing the right investment vehicle.
Consider Alternatives Carefully
Aside from buying up shares of water stocks or ETFs, there are a couple of other ways to invest in water. You could buy or lease water rights directly from a land owner. This can be tricky, however, since water rights are governed at the local, state and federal levels.
Another option is to buy a piece of land with an existing water source, such as a spring. Again, you’d have to be clear on what the legal guidelines are for using and profiting from the land’s water supply. Before going down either path, it’s a good idea to consult with an investment advisor and an attorney to be clear on what your rights are.
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Unless technological advancements make it easier to access the world’s fresh water supply, water will continue to be a scarce commodity around the globe. Investing in water now might pay off down the line, but investors need to weigh their options thoroughly before taking the plunge.
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