Water has its own unique dynamics: It's a commodity that doesn't trade like a commodity, and it's a substance that has no substitutes. And, of course, life--and commerce--are impossible without it. As the population grows, it will put inexorable supply-and-demand pressures on water that will only intensify. Many forecasters believe the global scramble for clean, usable water will greatly affect the geopolitical and economic landscapes of the 21st century.

For investors, though, the water sector also presents a compelling opportunity. The market for water products and services is estimated to be $400 billion to $500 billion annually. The market is also complicated-a vast and diffused area cutting across various industries. It includes stodgy utilities that deliver water to your tap, as well as high-tech companies that do state-of-the-art hydrological modeling or make cutting-edge biological and membrane treatments. Some companies make the pumps, pipes and valves that deliver water, while others make meters that measure how much water people use.

Probably the easiest way to invest in water is through the handful of exchange-traded funds and mutual funds that mimic various water-related indexes. But there are also individual companies and venture capital opportunities for investors hoping to latch on to a potential Google or Microsoft of water. That is, if a killer application for water even exists.

"There won't be a silver bullet solving the water issue," says Gerald Sweeney, portfolio manager at Aqua Terra Asset Management, a water-focused money manager. "There are multiple techniques and technologies that address different issues at different levels and geographies."

Thirsty Planet
The big picture is simple (and troubling). Namely, there's not enough clean, fresh water to meet the world's needs. If the global water supply could fit into a 55-gallon drum, roughly 53 gallons would be saltwater. Much of Earth's fresh water is either floating in the atmosphere or is locked frozen in ice caps and glaciers. And the fresh water supply we can access is dwindling--worldwide water usage zoomed sixfold during the 20th century, twice as much as population growth, according to a report by Summit Global Management, a water-focused hedge fund.

Assorted white papers and research reports are filled with factoids and gloomy scenarios about a looming water crisis, from melting glaciers that may no longer be able to serve as huge "banks" of water to the depletion rates of many major aquifers. It's estimated that more than 1 billion people don't have a sufficient drinking water supply, and 2.6 billion don't have access to basic sanitation.

The uneven global distribution of water adds to the problem. According to Summit Global Management, fewer than 10% of all countries possess 60% of the world's supply of fresh water. That could spell trouble for countries such as China, which has grand economic aspirations and more than 20% of the world's population, but only 7% of the renewable water resources.

And the amount people need for drinking and bathing is a proverbial drop in the bucket compared with the water needed for agriculture and industry. It's estimated that 70% of global water use goes toward growing food, and that could rise with population growth and shifting diets as emerging market countries become wealthier and eat more dairy products and meat, which require much more water to produce than crops. Meanwhile, trillions of gallons of fresh water are used for manufacturing in industry.

Investing Through Osmosis
For years, water utilities were synonymous with water investing. And for good reason: These staid local monopolies have been a steady cash cow and dividend producer no matter what the economic climate. In the 10-year period ended 2008, U.S. water utility stocks as a group had total returns of 128% versus 18% for the Dow and losses of 13% and 24% for the S&P 500 and Nasdaq, respectively.  

And they might get a boost from a potential consolidation wave. According to Summit Global Management, global water utilities have the lowest percentage of ownership of all forms of utilities. As of 2006, there were 54,000 community water systems and 16,000 wastewater treatment facilities in the U.S., setting the stage for a slew of water roll-up strategies to create economies of scale.