FIW: The Best Choice If You're Determined To Own A Water ETF

The First Trust Water (FIW) ETF has been the top-performing water-themed ETF over the past decade, significantly outpacing peers and the Russell 2000, and performing competitively against the S&P 500. However, analysis reveals structural concerns, including a high 0.53% expense ratio and questionable holdings like IDEXX Laboratories and Agilent Technologies, which dilute its water-centric theme, despite 57% allocation to industrials. While acknowledging its historical outperformance, the author assigns a 'Hold' rating due to these inherent limitations in achieving pure economic exposure to water resources through an ETF, suggesting better opportunities may lie in capital-light businesses.

Analysis

First Trust Water (FIW) is identified as the best-performing water-themed ETF over the last decade, having generated a 57% greater return than its peer Invesco Water Resources (PHO) and outperforming the Russell 2000 by 66% since 2010. Despite this strong historical performance, which was competitive even against the S&P 500, significant structural issues warrant a cautious outlook. The core challenge is the difficulty in achieving pure economic exposure to water as a natural resource via an ETF. FIW's portfolio construction reflects this, with questionable holdings like IDEXX Laboratories and Agilent Technologies, whose primary businesses are veterinary diagnostics and life sciences, respectively, thus diluting the fund's thematic integrity. Furthermore, the ETF carries a high expense ratio of 0.53% for a passively managed fund, which erodes long-term returns, and offers a meager 0.71% dividend yield. While its P/E ratio of 24.6x is below that of the S&P 500, it is considered elevated for a portfolio heavily weighted towards industrials (57%) and utilities (15%), suggesting potential valuation risk relative to its underlying sector composition.

Key Decisions for Investors

• Given FIW's status as a historically top-performing fund in its niche, current holders may justify a 'Hold' position, but must remain cognizant of the structural flaws that could impede future returns.
• Prospective investors should critically assess whether the high 0.53% expense ratio and the inclusion of non-core holdings like IDEXX and Agilent align with their goal of gaining targeted exposure to the water industry.
• Consider the valuation risk, as a P/E multiple of 24.6x is arguably high for an industrial-heavy portfolio, and weigh the opportunity cost against investing in less capital-intensive sectors with potentially stronger growth profiles.
• Investors seeking income should avoid this ETF due to its very low 0.71% dividend yield, a factor compounded by the significant fee drag over a long-term holding period.