Every day, Americans rely on 2.2 million miles of aging water pipes, some laid before the Civil War, to deliver life’s most essential resource. This vast network is crumbling beneath our feet, requiring over $2 trillion in repairs and upgrades by 2043. Yet this infrastructure crisis isn’t just about fixing what’s broken – it’s about building for a future where three-quarters of Earth’s land masses are becoming permanently drier and extreme weather events are the new normal.

For investors, this convergence of urgent infrastructure needs and climate adaptation creates both responsibility and opportunity. But with options ranging from focused water ETFs to broader infrastructure funds, making the right choice isn’t straightforward. This guide will help you navigate the landscape of water infrastructure investing, weighing both the compelling case for sector-specific investment and the practical challenges that come with it.

The Volker Alliance estimates that the states already face an estimated backlog of nearly $1 trillion for deferred maintenance and needed upgrades to public infrastructure. In January 2025, “Not Built for This: The Argument for Infrastructure Investing in an Unstable Climate” highlighted the case for infrastructure investments in your portfolio and the infrastructure funds, both open-end and exchange-traded, that might be worth consideration. WABAC, a member of the MFO discussion community, argued that “any discussion of new opportunistic infrastructure funds is incomplete without mentioning water funds. Start with PHO or FIW if you are H2O curious. There are global water funds, but they have faced rougher sledding over the past three years. You could start with PIO and TBLU. I’m not smart enough to imagine how they might perform in the tariff regime promised by our new president.” Since I take our board members’ insights seriously, we are offering this addendum on water infrastructure investing for you.

Water infrastructure includes drinking water, wastewater, and stormwater services. There are two drivers of demand for investment in water infrastructure. First, we’ve allowed our existing infrastructure to deteriorate. The American Society of Civil Engineers estimates that US water infrastructure needs, in particular, are huge:

In 2024 alone, the projected gap between water infrastructure needs and spending in the United States will be $91 billion; by 2043, the cumulative gap will be over $2 trillion. (Bridging the Gap: The Power of Investment in Water, May 2024)

By their calculation, fully funding water infrastructure needs would generate “a $4.5 trillion gain in GDP, the creation of 800,000 new jobs, and a $2,000 annual increase in household earnings.” Water investment vehicles enable participation in a sector where every $1 million invested creates 10–15 jobs while addressing existential climate risks

Second, water-related infrastructure investments are becoming increasingly critical as climate instability intensifies water scarcity, flooding, and ecosystem degradation. A sobering report released in December 2024 finds that “human-driven climate change is leading to a permanent state of increased dryness on 77.6% of the Earth’s land masses, a steady desiccation that has been playing out over the 30-year period from 1990 to 2020” (“Three-Quarters of the Earth Has Gotten Permanently Drier,” Time, 12/10/2024 reporting on the UN Convention to Combat Desertification, The Global Threat of Drying Lands, 12/2024). This isn’t discussing drought, which is temporary. It’s documenting a permanent change in the water cycle. In the US, the arid zone is moving relentlessly eastward “with no end in sight” according to scientists from Colorado State and the University of Michigan. Aridification is threatening food security, while extreme rainfall events are increasing in frequency and intensity. These trends are not hypothetical, they are happening now, and they demand practical solutions. Investing in water infrastructure is about adapting to these realities, regardless of their cause. It’s about protecting communities, economies, and the environment from the challenges we already face.

Infrastructure investments support climate resilience through improved water management systems, sustainable technologies, and natural infrastructure solutions like watershed restoration. Financial instruments like water-focused mutual funds and ETFs offer investors exposure to this essential sector while contributing to long-term environmental stability.

Role in Climate Resilience 

Water infrastructure investments address three key climate challenges: 

1. Adaptation: Supporting technologies like smart water systems and desalination plants
2. Risk Mitigation: Restoring floodplains and wetlands to reduce disaster impacts
3. Sustainability: Funding utilities and companies improving water efficiency and recycling

These investments align with global priorities to modernize aging systems. Two questions remain:

1. Does it make any sense to invest in a water fund, as opposed to a broader infrastructure fund?
2. If it does make sense for you, which options might align with your goals?

Choosing broad or narrow

Everything above supports investing in water resources, which undeniably benefit from long-term tailwinds. However, there are two elements of a case against them.

First, investors misuse thematic funds. Jeff Ptak is the latest in a long line of Morningstar analysts to assess the performance of thematic / sector funds as a group. Mr. Ptak looked at two metrics: (1) the timing of investor moves into thematic funds and (2) the performance of those funds over the three years ending November 30, 2024. The results were not pretty:

What I found is that, over those three years, the average dollar invested in thematic funds lost around 7% per year. Even when you remove the largest thematic fund―ARK Innovation ETF, which famously soared, gathered billions in assets, and then fell like a stone―these funds still lost almost 6% per year in dollar-weighted terms. To put that in perspective, the S&P 500 gained more than 11% per year over that span. (“What Does it Cost to Be Entertained By Your Investments? Try 14% a Year,” Morningstar.com, 1/15/2025)

The problems were manifold: the funds’ performance sucked, they charge a lot and investors mistimed purchases. We, as a group, bought funds in areas that the analysts (and shills) were hyping. Ptak’s suggestion: if you want to invest in a sector fund, pick the area that Wall Street has written off for dead. With annualized returns, for the water funds below, -2.5% to 3.2% over the past three years, maybe water qualifies?

Second, broader funds might get you there with less fuss. Water funds tend to focus on smaller, high-growth companies which typically do not pay dividends. That means they tend to be more volatile and, hence more likely to scare off investors than the average equity. Other places where water investments lie, albeit in limited quantity, are infrastructure and utilities funds. The average infrastructure fund offers 5-15% exposure to water infrastructure investments. The average utility fund is about 3% “pure” water and 22% diversified utility companies which would likely have water infrastructure in their portfolios.

Five-year snapshot, three peer groups, and three top performers

The water group is composed of the water-centered funds and ETFs below, while infrastructure and utilities are Lipper peer groups. Within each group, we picked our top-ranked Great Owl fund or best performer to help answer the question, how good can it get?

Collectively, water funds outperformed both infrastructure and utilities, but with substantially more volatility (measured by the funds’ maximum drawdown over the period and by their standard deviation). In risk-adjusted terms, the picture is muddled: water had a higher Sharpe ratio (which is good) but also a higher Ulcer Index (which is bad, with higher Ulcer ratings translating to deeper and longer drawdowns hence more ulcers). Utilities predictably threw off more cash.

Choosing a water fund

We used the MFO Premium screener to identify all funds and ETFs older than three years with “water” in their names (then threw out the ones where Water was just part of the advisor’s name).

Fidelity Water Sustainability does not yet have a five-year record but has substantially outperformed the S&P Global Water index of the past 1- and 3-year periods.

• FLOWX emerges as a top-tier actively managed fund, offering strong returns, ESG alignment, and global diversification. It would be a compelling choice for investors prioritizing sustainability and willing to pay slightly higher fees for active management.
• PHO and FIW remain the leaders in terms of raw performance and cost-efficiency, making them ideal for investors seeking low-cost, U.S.-focused exposure to the water sector. (Which WABAC already tipped us off to.)
• CFWAX and EBLU continue to be strong ESG-focused options, but FLOWX’s slightly higher returns and comparable risk-adjusted performance make it a competitive alternative.
• AWTAX and PIO remain solid choices for global exposure, though they lag slightly behind in performance compared to FLOWX and the U.S.-focused ETFs. It’s hard to project what effect Mr. Trump’s various impulsive rulings will have on global investors.

Bottom Line

When selecting water-oriented funds, you will need to consider factors such as management style (active vs. passive), geographic focus, and ESG alignment. Actively managed funds like FLOWX might offer higher returns but come with higher fees, while passively managed ETFs like PHO and FIW provide cost-effective exposure to the water sector.

In conclusion, water-related mutual funds and ETFs play a crucial role in infrastructure portfolios, offering resilience, growth potential, and alignment with sustainability goals. As climate instability continues to shape global markets, these investments provide a compelling opportunity to address one of the most pressing challenges of our time.