As environmental, technological, demographic, and other factors accelerate the pace of change in the world, thematic investing can potentially help investors anticipate powerful long-term trends and capture the associated growth opportunities.
Thematic investing can offer an alternative to what might be considered the default or “traditional” ways of allocating to equities. Investors often lean into style classifications – such as quality, value, or growth – or allocations made based on geographic or sector groupings. These can all have a place in portfolios, but thematic investing offers a different type of opportunity that includes targeted and unconstrained sources of return that are largely overlooked or severely underweighted by traditional investment building blocks.
Thematic ETFs incorporate all the efficiencies institutional investors expect of ETFs as an instrument, and they allow investors to incorporate specific ideas and trends into their portfolios that have high growth potential and low correlated sources of return. Innovation in the thematic space has increased in recent years, evolving to cover new opportunities.
The thematic investment case for water
A theme with particularly compelling potential over the long term is water.
Only 1.2% of water on Earth is available for human use, and 40% shortfall of the available global water supply is expected by 2030, according to the UN. In addition, 41% of the global population today lives in areas of high or very high water shortage.1
CDP – a non-profit that runs the global disclosure system for investors, companies, cities, states, and regions to help manage their environmental impacts – says that 69% of companies that report to it on water are exposed to water-related challenges that could cause a substantive change in their business. At risk? $225 billion in publicly listed equities – and that’s only among those companies that report to CDP.2
To remain competitive, many companies may need to become more adept at water management, and learn to do more with less.
There are various ways investors can access such companies, but one with the lightest lift is via thematic ETFs that provide a comprehensive approach to investing across the water value chain. Companies in such a fund likely derive a proportion of their revenues from water products or services, or demonstrate relative efficiency in their water management. As an example, iShares’ MSCI Water Management Multisector ETF (IWTR) can be used to express a high conviction view on water and invest in the theme of an increasingly scarce natural resource.
A water-focused ETF can also provide diversification to a portfolio, and less reliance on growth sectors such as tech. To extend the IWTR example, it accesses a differentiated source of growth investing across industrials, consumer staples, and utilities that efficiently manage water – a group of companies often overlooked by growth investors, and which might be positioned to ride a multi-year tailwind.
1 The State of Food and Agriculture” (FAO,2020). High and Very High levels of water shortage are defined as the historical (1984-2018) frequency of drought on rainfed cropland, 20-30% and 30%+ respectively.
2 High and Dry: How Water Issues Are Stranding Assets ” (CDP, 2022). Sample water risks may include reduced availability of fresh water or a lack of biodiversity that could impact business operations in a specific region.
