Data centers and semiconductor factories are the powerhouses of AI and the digital economy, but their water usage tends to fly under the radar. And here’s the thing: these facilities consume humongous amounts of water – data centers for cooling servers and manufacturing plants in the chipmaking processes. With digital services booming and infrastructure scaling up, these industries need smarter, more efficient water management – not just to address environmental concerns, but also to keep operations running smoothly.

This rising demand opens up exciting investing opportunities across the water value chain, from advanced cooling systems and ultrapure water technologies to real-time monitoring and industrial recycling solutions. Forget boring water utilities or overly diversified infrastructure plays – I’m talking about the places where tech and water collide. Here’s a deep dive into the companies making an innovative splash, plus a fully investable portfolio you can use to tap into this growing theme.

Thesis

• Data centers and semiconductor fabrication plants (or “fabs”) are thirsty beasts – data centers use water for cooling and fabs rely on ultrapure water in chip production. And their growth is fueling demand for solutions across the water value chain – and that includes pumps and valves, treatment systems, advanced cooling technologies, internet-of-things-enabled instrumentation and monitoring tools, and engineering expertise.
• Sustainability pressures and government regulations are accelerating the shift to smarter water management – especially with many facilities located in water-stressed regions. But the biggest driver isn’t red tape: it’s profit. For high tech, saving water means saving money, which is a powerful business incentive.
• Water is shaping up to be high tech’s next big bottleneck, much like Nvidia’s chips in AI. While energy demands have grabbed all the market’s attention, water’s critical role remains under the radar – creating an overlooked and exciting investment opportunity.
• This theme blends “old economy” industrials with a tech edge, giving your portfolio a front-row seat to the benefits of bigger fiscal spending and the ongoing tech revolution. And the best part? The solutions being developed for high tech could spill over into other water-intensive sectors like pharmaceuticals, energy (“drill, baby, drill”), and advanced manufacturing, widening the investment potential even more.

Risks

• Economic sensitivity and business cyclicality. Tech infrastructure spending is going gangbusters now – particularly in data centers and fabs. But a slowdown could dampen demand for water solutions and infrastructure projects.
• Supply chain and geographic risks. Firms with major exposure to specific regions could suffer because of geopolitical tensions or supply chain disruptions
• Technological disruption. Emerging tech could render existing water management solutions obsolete, leaving established players vulnerable to losing market share to innovative startups or new entrants with better products.
• Competition and margin pressure. Intense rivalries in the water management space, especially among niche players, could lead to price wars and shrinking profit margins for companies that depend on cost-sensitive clients.
• Valuation concerns. Shares of companies in this space may already be priced at a premium, especially niche water treatment or instrumentation players.
• Deregulation. Water companies could face challenges if looser rules slow investment in sustainable water solutions or weakens environmental standards.

Part I: THE CASE FOR WATER IN TECH

With global water demand expected to outstrip supply by 40% by 2030, it’s not hard to see why famed investor Michael Burry has called this “next big trade”. One particular play stands out to me: water in high tech. Data centers, the backbone of the digital economy, use huge amounts of water to cool servers and keep things running. Meanwhile, chipmaking facilities guzzle millions of gallons a day. For both industries, water isn’t just a sustainability issue – it’s critical for keeping operations going and scaling growth.

When Michael Burry – The Big Short investing star made famous for his bet on the US housing bubble in the early 2000s – dubbed water the next big trade, it turned a quiet opportunity into a headline investment theme. Water is essential for life, but it’s becoming increasingly scarce. Blame it on population growth, industrial expansion, aging infrastructure and climate change. But there’s also a looming water quality problem that adds another complicating layer, with “forever chemicals” and inadequate wastewater treatment threatening human health, the environment, and food security. This has led the World Economic Forum to predict that global water demand will outstrip supply by 40% by 2030. This challenge is so big it could jeopardize economic and political stability, while also leaving the planet miles from the UN’s sustainable development goal of universal access to water and sanitation by that same year: 2030.

As for the water investment theme, there are lots of ways to tap in. You could invest in traditional water utilities for steady, regulated income or desalination companies that are working to tackle water scarcity in drought-prone regions. Water infrastructure firms, meanwhile, focus on upgrading pipelines and treatment plants, while agriculture water management companies zero in on efficient irrigation for farms. Even bottled water brands and vertical farming offer ways to benefit from the growing demand for clean water and sustainable food production. And, more recently, emerging areas like PFAS (forever chemicals) removal have presented interesting opportunities as regulations tighten and industries scramble to comply.

Some of these ideas could see solid returns over the next decade or two. Still, they come with hurdles like big price tags, a reliance on government funding, regulatory and political risk, and scalability challenges. So it might take a while before they really pay off – and even then, many firms might see their profits whittled away by regulatory costs. The good news is, ETFs provide simple and relatively cheap ways to gain broad exposure to the theme. For example, there’s the Invesco Water Resources ETF (ticker: PHO; expense ratio: 0.59%), the First Trust Water ETF (FIW; 0.53%), or the Invesco S&P Global Water Index ETF (CGW; 0.56%).

I’ve done some digging into the theme, and I think there’s a more interesting, and overlooked way to play it: water in tech. It hits all the right notes – riding the global push for water treatment, conservation, and efficiency while tapping into the booming AI revolution through its ties to data centers and fabs. The best part? Its growth is fueled by profit-motivated efficiency, not red tape. See, water prices are climbing, and tech breakthroughs are driving the need for advanced solutions to keep costs in check. In fact, water is shaping up to be the next bottleneck in high tech – a bit like Nvidia’s chips. Companies adopting smarter water management aren’t just going green – they’re saving green too, making this as much about business smarts as sustainability.

Here’s a look at where water and high-tech collide.

Driver 1: Data centers.

These hulking, tech-packed facilities – the backbone of the digital economy – rely heavily on water to cool the servers powering everything from websites to AI. Nvidia’s latest server racks generate up to 120 kilowatts of power each. That’s a bit like cramming 100 old-school furnaces into a single square meter. Now multiply that by thousands of racks in one facility. No surprise, then, that cooling eats up almost half of a data center’s total energy consumption.

Many use closed-loop cooling, where heat from servers is transferred to a water-cooled heat exchanger, which then recirculates cooled water to maintain optimal temperatures. Bigger facilities often rely on cooling towers, which spray water to evaporate heat, with the remaining liquid collected and reused. While effective, these systems consume vast amounts of water – around 300,000 gallons a day for an average data center – and cause environmental concerns, including high usage, evaporation losses, and discharge that can harm natural ecosystems.

As data centers have become more dense with high-performance computing equipment, those traditional air-based cooling systems have had a harder time keeping up. That’s led to the rise of liquid cooling systems, which offer a more efficient way to manage heat. In general, liquid cooling uses two methods: immersion cooling, where servers are submerged in non-conductive fluid, and direct-to-chip cooling, which targets specific components like central processing units (CPUs) and graphics processing units (GPUs) with closed-loop systems. They improve cooling efficiency and can reduce overall water consumption. That said, they often complement (rather than fully replace) evaporative systems, so there’s still demand for cooling towers and hybrid solutions.

But, look, data centers don’t just need cool temperatures, they also need drier air – moisture can damage their servers. So they need one set-up to keep things cool, and a dehumidifying system to remove excess moisture. Plus, they need a water-cleaning system too, for the contaminated wastewater that’s produced in the cooling process.

And data centers' water needs don’t stop at their walls – they’re tied to the cooling demands of the thermoelectric power generation that fuels them. For every watt used in computing and operations, an equal amount is typically needed for cooling, and that’s driving major water demand across the entire energy supply chain. In the US alone, thermoelectric power accounts for 39% of total freshwater withdrawals, with coal, natural gas, and nuclear plants consuming thousands of gallons per megawatt hour in power generation and cooling.

The explosive growth of AI and cloud computing has put unprecedented strain on data centers' water resources. Training AI models like OpenAI’s ChatGPT can use up to a half-gallon (two liters) of water per ten to 50 queries, compounding those already staggering water needs. In 2023, Microsoft’s water usage surged 34% from the year before to 6.4 million cubic meters, mostly driven by AI cooling demands. Water consumption by dozens of facilities in Virginia’s “data center alley” – including facilities used by Microsoft, Amazon, and Google parent Alphabet – has jumped by almost two-thirds since 2019. We’re talking nearly 1.9 billion gallons (or seven billion liters) of water consumed in 2023 compared to 1.1 billion gallons in 2019.

What’s worse, many data centers are guzzling water in places that can least afford to spare it – 23% of Microsoft’s and 18% of Alphabet’s water withdrawals come from water-stressed regions. And that means sustainability isn’t a nice-to-have anymore – it’s a must. So both companies are aiming to go “water positive” by 2030, pouring cash into replenishment projects and cutting-edge cooling tech. And with these giants leading the charge, this trend will only get bigger, making water management a prime spot for innovation – and investment.

Driver 2: Semiconductor fabrication plants (“fabs”).

Fabs – the factories producing the chips that power modern technology – are among the most water-intensive facilities in the world. A single fab can use up to ten million gallons of water a day – enough to fill 15 Olympic-sized swimming pools. Globally, fabs consume as much water as a city the size of Hong Kong.

Most of this water is used to create ultrapure water for cleaning silicon wafers – the foundation of semiconductor chips. These thin silicon discs host intricate circuits that even a tiny speck of dust could disrupt. To ensure they remain pristine, fabs use advanced processes like reverse osmosis, deionization, and ultraviolet treatment to strip water of impurities, creating the ultrapure standard that’s needed for manufacturing. Think about the cycle here: it’s basically using technology to make water more efficient in order to create more technology.

Water is also needed for cooling systems, which manage the heat from high-tech equipment and maintain those “cleanroom” conditions. Plus, fabs generate significant wastewater-containing chemicals, which must be treated before being reused or discharged. And since many data centers are in water-scarce regions like Arizona, Shanghai, and parts of Korea, many fabs are forced to invest heavily in recycling systems to reduce freshwater consumption and meet strict environmental regulations.

Take Taiwan Semiconductor Manufacturing Company (TSMC): this global leader in chip production is expected to double its water usage by 2030. And according to S&P Global, poor water management could lead to production shortfalls of as much as 10% – which would push up the unit cost of its chips significantly. So it’s important to manage water carefully. For fabs in water-stressed areas, sustainability efforts are no longer optional – they’re critical to maintaining operations.

Part II: THE OPPORTUNITIES

The growth of data centers and semiconductor fabs is opening investing opportunities across the water management value chain – in areas like water treatment and filtration for ultrapure systems, pumps and valves for cooling and water pipelines, and piping and plumbing for efficient water transport. But innovation is also happening in instrumentation and monitoring for cooling towers and heat exchangers. Meanwhile, water conservation and recycling technologies are gaining momentum as sustainability pressures mount. And it probably won’t be long before you know someone working in water: engineers, consultants, and a lot of other professionals will be busy designing and optimizing advanced water systems.

The expansion of data centers and semiconductor manufacturing are leading to investing opportunities across the water management value chain. Companies providing ultrapure water systems, industrial recycling, and wastewater treatment technologies are in a good spot: poised to benefit as fabs push for greater efficiency and sustainability. At the same time, data center demand is likely to boost firms that provide advanced cooling systems, liquid recycling technologies, and real-time water monitoring.

Pure-play investments here are tricky to find. Many companies cater to multiple industries with diverse portfolios that mix water, heating, cooling, and energy solutions. Smaller, specialized players are often private or buried within huge conglomerates, narrowing the investable options. But as demand for cutting-edge water solutions grows, even some indirect players could emerge as winners. Here's a breakdown of the key opportunities and the stocks that could benefit.

1) Water treatment and filtration.

Water treatment and filtration solutions are a hot ticket. Data centers rely on treated water for cooling – and that makes bacteria-killing biocide products essential, along with mineral-halting scale inhibitors. And fabs need ultrapure water for precision manufacturing, which requires advanced filtration tech like impurity-removing reverse osmosis and charged-particle-removing deionization.

Here are the companies that stand out as particularly promising in this space, and why:

2) Pumps and valves.

Pumps and valves play a crucial role in data center cooling systems and fab ultrapure water pipelines. While their role is often indirect – they’re integrated into bigger water management systems – the rising demand for liquid cooling and ultrapure water creates nice opportunities for companies offering efficient, durable, and specialized solutions.

3) Piping and plumbing.

Data centers and fabs require extensive, high-performance piping systems for cooling, ultrapure water transport, and wastewater treatment. Rising demand for liquid cooling in data centers and contamination-free water systems in fabs makes durable, efficient, and specialized piping solutions essential – particularly as sustainability efforts encourage water-efficient methods. But pure-play investments are rare here, because most of these products serve multiple industries.

4) Instrumentation and monitoring.

Instrumentation and monitoring are critical for the smooth operation of data centers and fabs because they ensure precise control of water usage, leak detection, and temperature management. As these industries have expanded, the need for real-time, “internet of things”-enabled solutions has surged, with big opportunities for providers of smart monitoring technologies. These systems are important for making things run efficiently, preventing costly disruptions, and supporting sustainability goals.

5) Cooling tower and heat exchanger manufacturers.

Cooling towers and heat exchangers are critical too: they help dissipate heat and regulate water temperatures. Data centers increasingly rely on water-intensive cooling systems like direct-to-chip liquid cooling and immersion cooling – both of which benefit from advanced heat exchange technologies. Similarly, fabs require precise temperature control in their ultrapure water processes, making energy-efficient heat exchangers and hybrid cooling systems vital. This growing demand positions manufacturers of these technologies to capitalize on the need for sustainable, high-performing cooling solutions.

6) Water conservation and recycling.

As big-time water consumers, data centers and fabs have been increasingly adopting advanced conservation and recycling technologies to minimize their environmental impact and their operating costs. These facilities rely on things like reverse osmosis recycling, thermal recovery, and closed-loop processes that can recover and reuse water efficiently, especially in drier regions. The drive for sustainability and stricter regulations further fuels the demand for innovative fixes – which can create huge opportunities for companies specializing in water reuse and conservation technologies. There’s compelling growth potential in this slice of the industry, sure, but not a lot of pure-play firms – most of the players are focused on broader markets.

7) Engineering and consulting services.

Specialized engineering and consulting firms are helping to design, optimize, and integrate advanced water systems in data centers and fabs. And that means ensuring that facilities meet stringent sustainability targets, optimize water usage, and comply with regulations. So these firms are laying out end-to-end solutions, from preliminary feasibility studies to implementation of advanced water reclamation and recycling systems. As data centers and fabs continue to expand, these services will become increasingly sought after.

8) Diversified plays across the water value chain.

These companies address various parts of the water value chain – things from treatment and filtration to recycling and waste management. Their solutions support data centers and fabs by enhancing sustainability, meeting high water demands, and ensuring regulatory compliance.

Part III: CONSTRUCTING AND INVESTING IN A WATER PORTFOLIO

To tap into the opportunities around water use in these industries, I built a diversified portfolio that spans different parts of the value chain, offers broad geographic exposure, and includes direct and indirect plays. After thorough research, I narrowed the list of firms to 25 for our Water In Tech thematic basket.

My goal was to strike a balance between business model conviction and diversification, focusing less on picking the "purest plays" and more on creating a robust thematic portfolio. This approach is designed to capture long-term growth potential and deliver attractive returns over the coming months and years.

Here are the 25 companies that made the basket:

This portfolio offers a nice spread across the water value chain. You’ve got clear pure plays like Kurita Water and Nomura Micro Science, sure, but you’ve got some less obvious ones too. For example, Mueller and Northwest Pipe are heavily water-focused but more indirectly linked to tech. Then there’s Vertiv, which isn’t directly about water but is connected to water in tech and could benefit as data centers and fabs ramp up their resource management efforts. Not every company here is a pure play on water and tech, but each one is likely to capitalize on the increasing demand for water in these high-tech industries – and that’s what makes it a thematic portfolio, not a high-conviction bet on a handful of names.

Sure, the portfolio leans heavily on industrial stocks, but it’s nicely spread across sub-industries – think machinery, construction, and services – and even dips into other sectors like tech, materials, and utilities for added balance.

Of course, there was a high degree of subjectivity involved in choosing these stocks – I weighed up things like the business’s quality, growth potential, valuation, and the unique spin it brings to the opportunity. And in my assessments, I drew some inspiration from Citrini Research's outstanding work on the topic. And, hey, you might disagree on the inclusion (or exclusion) of a specific firm – and that’s fine. Again, I had the end portfolio in mind when selecting these companies. And since I’ve shared the broader universe of 50 companies in Part II, you can always use that as a springboard to create your own water portfolio.

Now, to some of you, 25 companies will seem like a lot, but it’s fewer than what typical ETFs hold – and it strikes a sweet spot. You’re minimizing one-off risks while still keeping things focused. What’s more, constructing such a portfolio today is simple and cost-effective. It might take you a half-hour to implement, but I firmly believe that’s time well-spent.

Your final takeaway.

Keep in mind: this isn’t a broad water portfolio like a typical ETF, so don’t expect it to behave like one. It’s also not a high-growth play—so no Nvidia-level returns here. Instead, this is a strategic, water-focused basket, built to tap into the growing demand for sustainable water solutions in data centers and fabs.

A few things to consider:

Thematic focus: This portfolio prioritizes the water-tech theme over deep fundamental analysis, so some stocks might be overvalued or underperforming. It’s a starting point—do your research before committing.

Customization: Tailor it to your goals. You can make it more aggressive by focusing on specific companies or more diversified by pairing it with a broader water ETF.

Evolution: This portfolio will likely evolve as market conditions and my research progress—so stay tuned for updates.

Finally, remember the risks. These companies are generally high quality, but they’re not cheap compared to the broader market. A pullback—driven by regulatory changes, geopolitics, or shifts in sentiment—could happen. That said, such events might also offer better entry points without undermining the long-term thesis.