The Water and Agriculture Thematic ETF Portfolio

Investing in the bare necessities of life seems like a no-brainer, right? Everyone needs food and clean water, and the companies that deliver them should, in theory, print cash year after year. And to some extent, that’s true.

These industries are generally profitable, and when you invest in a broad basket of related companies (and not from a structurally broken sector like cannabis) and let market cap weighting do its thing, the results can be respectable. Larger, more established firms naturally get more weight, which brings some stability and quality.

But will that kind of portfolio actually beat the market? That’s the million-dollar question. Here’s how a simple thematic ETF portfolio of agriculture and water stocks, built using two iShares TSX-listed ETFs, stacks up against the global equity market.

iShares Global Water Index ETF (CWW)

Half of this portfolio is allocated to CWW, which tracks the S&P Global Water Index, a basket of 64 global companies involved in the business of water. That includes firms focused on water utilities, infrastructure, equipment, and treatment technologies.

It’s important to clear up a common misconception here: none of these companies are trading, hoarding, or speculating on water as a commodity. This isn’t about betting on who controls the next great freshwater supply.

Instead, CWW gives you exposure to companies that provide the nuts and bolts of water systems. For example, Xylem makes pumps and flow control equipment. American Water Works operates regulated water utilities. Core & Main supplies water infrastructure products, and Ecolab specializes in industrial water treatment solutions.

In practice, CWW is less about natural resource ownership and more a basket of niche industrial, utility, and materials sector stocks. It’s one of the older iShares Canada ETFs, having launched back in 2007, and while its 0.66% expense ratio might have been acceptable then, it feels expensive by today’s standards. That said, performance has held up, with a solid 10.77% annualized return over the past 10 years.

iShares Global Agriculture Index ETF (COW)

The other half of the portfolio goes into COW, which provides broad agricultural exposure, but not just to farms growing crops. It tracks 36 companies selected by the Manulife Investment Management Global Agriculture Index, a bit of a surprise given Manulife’s reputation for insurance, not index construction.

If you’re hoping for pure-play exposure to farmland or food production, you’ll likely be disappointed. This ETF leans heavily into agrichemicals, machinery, and processing. For example, Corteva is a leader in crop protection and seed technologies. Deere & Co. is best known for its tractors and agricultural equipment. Mosaic is a major producer of fertilizers.

Like CWW, COW is also a narrow portfolio and not cheap. It launched around the same time in late 2007 and currently carries a 0.71% expense ratio. That’s steep for a passive fund.

Still, it’s managed to deliver 9.05% annualized returns over the past 10 years, with much of that driven by strong performance during inflationary periods. In 2021 and 2022, the fund posted gains of 31.72% and 12.47%, respectively. COW clearly acts as a potent inflation hedge, given agriculture’s tight link to input prices and food costs.

Putting it together

Over the last nine and a half years, a simple 50/50 portfolio of CWW and COW, rebalanced annually, turned a $10,000 investment into $24,156. That’s a 9.73% annualized return, which is nothing to scoff at, but still lags the 11.13% annualized return of the iShares MSCI World Index ETF (XWD), which grew to $27,250 over the same period.

There are a few reasons for that underperformance. The most obvious is cost. XWD isn’t exactly cheap at 0.48%, but it still comes in well below the blended expense ratio of CWW and COW, which sit at 0.66% and 0.71%, respectively. That kind of fee drag adds up over a decade.

More importantly, though, this portfolio is structurally underexposed to the biggest drivers of global equity returns during this period: technology, consumer discretionary, and communication services, especially in the U.S.

Instead, it leans heavily into industrials, materials, and utilities, which are slower growing, more cyclical, and less likely to benefit from the secular trends that propelled names like Apple, Microsoft, Amazon, Nvidia, Alphabet, and Tesla.

The bottom line: investing in the essentials like food and water might sound like a safe and sensible idea, and it can be. A 50/50 portfolio of COW and CWW wouldn’t have left you broke by any means.

But even with sound long-term themes, thematic investing isn't always cheap, and it’s rarely diversified. Without both of those ingredients, your portfolio might make sense on paper, but leave you with less money in practice.