CGW: The Most Valuable Commodity (NYSEARCA:CGW)

Exploding blue water balloon

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Investment Thesis

This is my third article on water ETFs. Given the future supply and demand imbalances for this commodity, I consider getting exposure to water stocks to be a very interesting long-term investment. As in most physical commodities, investing in water is a simple case of supply and demand imbalances – water supplies are limited, demand is rising. Industry trends and demographic changes are largely to blame for the growing demand for the limited supply of freshwater around the world. In many areas of the United States, for instance, the demand for freshwater is likely to increase while supplies decrease due, in part, to a changing climate. Other contributing factors include an increase in the human population and changes in land use and energy generation. In this article, I will do a review of the Invesco Global Water Index ETF (CGW) which provides exposure to a basket of global water stocks.

Strategy Details

The Invesco Global Water Index ETF tracks the performance of the S&P Global Water Index. To be eligible for inclusion in the Index, securities must be classified as being in either the water equipment and materials or water utilities and infrastructure segments. Constituents must have a minimum float-adjusted capitalization of $100 million and a total market capitalization of $250 million.

If you want to learn more about the strategy, please click here.

Portfolio Composition

From the sector allocation chart below, we can see the index places a high weight in industrials (representing around 47.45% of the index) followed by utilities (accounting for 43.04% of the index) and Information Technology (representing around 6.30% of the fund). The largest three sectors have a combined allocation of approximately 96.79%. I think it is important to see how that fits your diversification goals and if you are comfortable with higher exposure to these three sectors.

CGW sector allocation

Source: Invesco

In terms of geographical allocation, the top ten countries represent approximately 99.68% of the portfolio. The United States accounts for 53.21% whereas other countries such as China or Japan seem to be underrepresented given the low weight (only a 2.6% allocation to China and 2.55% to Japan).

CGW top country allocation

Source: Invesco

CGW invests over 53% of the funds into mid-cap blend issuers, where neither growth nor value characteristics predominate. Mid-cap issuers are usually defined as companies with a market capitalization between $2 billion and $8 billion. The second-largest allocation is in small-cap blend equities (companies with a market cap below $2 billion). It is interesting to see that this ETF allocates approximately 78.25% of the funds to mid-cap and small-cap issuers, which generally have a larger runway to compound than large-cap issuers.

CGW market cap & style allocations

Source: Invesco

The fund is currently invested in 50 different stocks. The top ten holdings account for 54.75% of the portfolio, with no single stock weighting more than 10%. All in all, I would say that CGW is relatively well diversified across issuers.

CGW top holdings

Source: Invesco

Since we are dealing with equities, one important characteristic is the valuation of the portfolio. According to Invesco, the fund currently trades at an average price-to-book ratio of 3.74 and at an average forward price-to-earnings ratio of 24.46. In addition to that, the portfolio has a return on equity of 14.88%. I generally consider a company trading at a forward price-to-earnings ratio above 20 to be richly valued. That said, I think there are some exceptions where you can pay a premium for an outstanding business that delivers a high return on capital and has good growth prospects. In CGW’s case, these companies have a good return on equity on average (close to 15%) and that could explain why the market is ready to pay a premium for these businesses. However, valuations are very important, especially in the context of higher inflation and rising interest rates, and I think it is hard to justify such a high price-to-earnings ratio at the moment.

Is This ETF Right for Me?

CGW has a distribution rate of 1.65%. Given the low dividend yield, this ETF is not suitable for the dividend investor. I have compared below the price performance of CGW against the price performance of the SPDR S&P 500 Trust ETF (SPY) and the Invesco Global Water ETF (PIO) over a 5-year period to assess which one was a better investment. Over the five-year period, SPY barely outperformed both water strategies. All in all, the two water strategies delivered solid results over that period.

To put it into perspective, a $100 investment in CGW five years ago would now be worth $202.26. This represents a compounded annual growth rate of 15.13% which represents a very good absolute return.


Source: Refinitiv Eikon

If we take a step back and look at the performance from a 10-year perspective, it is worth noting that the S&P 500 has actually outperformed both water strategies. That said, it is interesting to see that CGW did better than PIO. I think it just shows how hard it is for any strategy to beat the market over a long period of time.

INVS S&P WTR IDX, SPDR S&P 500, and INVSC II GB WTR comparison

Source: Refinitiv Eikon

Key Takeaways

To sum up, GCW provides exposure to a global basket of water stocks. The ETF is pretty well-diversified across issuers, although highly concentrated on industrials and utilities. In my opinion, I’m confident that water stocks will do well going forward given the increasing demand for this commodity. That said, purchasing a stock or an ETF which is in the right industry does not necessarily make it a great long-term investment. Every water ETF that I’ve covered so far is in my opinion expensive at the moment and CGW is no exception. I would personally wait for a 25-30% pullback before buying CGW.

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