The paradox of value, also known as the diamond-water paradox, highlights the contradictory price disparity between life essentials and luxury goods. Despite being crucial to life, the price of water is way lower than diamond, which has no bearing on human survival.

Economists base this observation on the law of demand and supply. The abundant supply of water pushes its price down, while the scarcity of diamond makes it relatively expensive in the market.

However, can human beings continue to take the access to drinkable water for granted in the next few decades? In the face of the ever-growing population, the problem of water shortage has become a front-and-center issue across the globe. According to the United Nations, 1.8 billion people are expected to suffer from absolute water scarcity by 2025, while two-thirds of the world population will be exposed to water stress conditions. Different cities are currently wrestling with water crisis: Cape Town is counting down to Day Zero in 2019, where the city will be completely running out of water, California is under massive wildfire threats brought by long and severe drought, and 40% of water in Beijing was too contaminated for agricultural or industrial use in 2015.

While demand for drinkable water is expected to escalate in the near future, asset managers are seeing opportunities in water investment. Unlike other commodities such as oil and gold, water investing does not take into account the price of water. Instead, it focuses on companies that develop new infrastructures to conserve and purify water, or invest in cutting-edge technologies to achieve sustainable water solutions.

Source: Allianz Global Investors

If an investor allocated USD 1,000 in the S&P Global Water Index, MSCI All Country World Index and S&P 500 respectively on November 16, 2001, the return he or she received on June 30, 2018 would have significantly outperformed the other two indices. The performance demonstrates that the growth potential of water businesses should not be overlooked.

Investors can get started by looking into different exchange-traded funds (ETFs) that track the companies involving water-related businesses. For example, the S&P Global Water Index ETF consists of 50 companies with the focus on water utilities and water equipment, and the PowerShares Global Water Portfolio provides international exposure to water-management-related corporations.

Seeing the demand for water as an ongoing societal need, water investing is being used as a long-term and defensive investment strategy to shield portfolios from market turbulence. With less dependence on political happenings and economic cycles, it also plays a less-volatile role in investment portfolios.

Sources:
http://unesdoc.unesco.org/images/0021/002156/215644e.pdf
https://www.bbc.com/news/world-42982959
https://www.forbes.com/sites/toddmillay/2016/11/28/investing-in-water/#6996aeaa5948
https://money.usnews.com/investing/articles/2016-06-22/how-to-invest-in-water-etfs
https://us.allianzgi.com/en-us/insights/investment-themes/water-an-essential-and-investable-asset
https://us.allianzgi.com/en-us/insights/investment-themes/jump-into-clean-water-investing
https://commodityhq.com/commodity/agriculture/water/#etfs