Buy This ETF to Profit From the Semiconductor Industry's Water Crisis

More than 70% of our planet is covered in water. However, only 3% is freshwater. Worse, of that 3%, only 1.2% is safe for consumption. Meanwhile, the global population continues to grow – by 2050, the United Nations forecasts there will be 9.8 billion people on the planet, up from about 8 billion people today.

Here in the U.S., according to Colorado State University research, nearly half of the 204 freshwater basins they studied in our country may not be able to meet the monthly water demand by 2071. On top of that, about 2.2 million people in the U.S. are already without running water, and more than 44 million have inadequate water systems.

Just as important, the lack of adequate water may start to affect industries sooner than we think. Let’s dive into the situation facing a crucial global industry - semiconductors.

Semiconductor Sector Water Worries

Investors have yet to recognize that the world’s nearly insatiable appetite for semiconductors has run smack into the consequences of climate change.

For example, let’s take a look at the world’s largest contract chip manufacturer, Taiwan Semiconductor Manufacturing (TSM). It produces all of the AI chips for Nvidia (NVDA).

Earlier in 2023, Taiwan experienced significant water shortages. This came less than two years after the country faced its worst drought in a century. The Tsengwen Reservoir, Taiwan’s biggest, was filled to just 11% of its effective capacity on March 17, according to government data. The level for the Nanhua Reservoir, which supplies Taiwan’s largest manufacturing hubs, stood at 41%.

And don’t forget that Taiwan Semiconductor is building a fabrication plant in Arizona. The company, not too wisely, picked a part of the U.S. increasingly prone to drought. Just as TSM announced its Arizona investment, the Southwestern states were in the midst of a “megadrought” that depleted the region’s two-largest reservoirs to record lows.

Water levels on Lake Mead, the largest U.S. reservoir, and Lake Powell, upstream on the Colorado River, dropped sharply and prompted federal officials to activate an emergency drought plan. Lake Powell’s water levels were at the lowest level since it was filled in the 1960s.

Wall Street's Snoozing

Most of Wall Street, and many shareholders in semiconductor stocks, seem oblivious to this risk.

Morgan Stanley cautioned in an August 27 report: “Investors should assess the long-term impacts of water supply amid climate change, especially when the production is concentrated in water-stressed areas” such as Taiwan. The country “relies heavily on seasonal rainfall to provide water supply, and climate change has made this a less reliable option.”

Unfortunately, most of the chipmakers’ regulatory filings do not go into detail about the water scarcity threats they face. Taiwan Semiconductor has said it wants to reduce unit water consumption by 30%, though its recycling efforts are not specific. The company has said it is working with the Taiwanese government on water recycling.

Nvidia this year said its operations could be harmed if they are hit by a range of natural disasters, including water shortages. Rivals made similar catch-all statements about overall risks to their businesses. Micron Technology (MU), one of the major players in the global DRAM memory chip market, disclosed that in 2021 it issued $1 billion of green bonds to help pay for water management investments, among other environmental initiatives.

There are some chip companies that are trying to recycle the fresh water they use in manufacturing. Intel (INTC) has said it is almost water-neutral, returning to the ecosystem almost as much clean water as it consumes. In 2021, the company used 16 billion gallons of freshwater, reclaimed water, and desalinated water. And with water management practices, it was able to return more than 13 billion gallons of water back to nearby communities.

But the water woes of the chip sector could get worse, thanks to the rapid rise of artificial intelligence (AI), according to Morgan Stanley: “The rapid development of AI is likely to increase water demand even more — semiconductor companies and data centers are both water intensive.” Their analysts cited 2023 research that found, in the time it took to train ChatGPT-3, Microsoft’s (MSFT) data centers directly consumed 700,000 liters (nearly 185,000 gallons) of clean water. That would be enough to produce 370 BMW cars, or 320 Tesla (TSLA) electric vehicles.

So, how can you tap into the water crisis via the stock market?

3 Top Water ETFs, and the Best Pick Right Now

The easiest way to trade water is through focused ETFs. Not only do these vehicles offer exposure to dozens of stocks in water-related sectors, but they do so at comparatively little cost. Here are the three largest water ETFs:

First Trust Water ETF (FIW): FIW is up 9.10% over the past year and 2.27% year-to-date. Its portfolio has about 52% in industrial stocks and 20% in utilities, with a 0.53% expense ratio.

Invesco Water Resources ETF (PHO): PHO is up 10.53% over the last year and 1.47% year-to-date. Its portfolio has roughly 54% in industrial stocks and 15% in utilities, with an expense ratio of 0.60%.

Invesco S&P Global Water Index ETF (CGW): CGW is up 7.85% over the past year, but down 3.22% year-to-date. Its portfolio has almost an even split between industrials (49%) and utilities (42%), with an expense ratio of 0.57%.

I prefer less exposure to utilities, so I would choose either FIW or PHO at their current prices. I’d lean toward PHO, based on a portfolio comparison.