Evaluating a New Hot Trend: The Case of Water Exchange-Traded Funds

Abstract

This article focuses on water exchange-traded funds (ETFs), namely the ETFs that are invested in several companies involved in the water business, such as entities that conserve and purify water and those that develop equipment and technology used by the water industry. Water ETFs are usually promoted as socially responsible investments. The performance of the four water ETFs available in the U.S. market is assessed vis-a-vis the performance of their tracking indexes as well as against the performance of the U.S. stock market represented by the S&P 500 Index and the market portfolio built by Fama and French. The several regression models used reveal that, no matter what the benchmark may be, water ETFs cannot offer investors significant above-market returns, and in several cases negative and significant alphas are estimated by the models. However, these significantly negative alphas are, in absolute terms, considerably lower than the average fee charged by the funds. Based on this element, we may conclude that the performance of water ETFs is overall normal and can be considered satisfactory by a socially responsible investor who seeks competitive rather than above average returns.