This study aims to evaluate the risk-adjusted performance and diversification characteristics of water-themed exchange-traded funds (ETFs), within the context of sustainable finance aligned to United Nations Sustainable Development Goal 6 (Clean Water and Sanitation). The author analyzes four leading water-themed ETFs, Amundi MSCI Water ESG Screened UCITS ETF (WATL.L), Tortoise Global Water ESG Fund (TBLU), L&G Clean Water UCITS ETF (GLUG.L) and iShares Global Water UCITS ETF (IH2O.L), to assess whether water-themed ETFs offer meaningful diversification relative to each other and whether multi-scale correlation analysis can enhance portfolio performance. The author tests whether correlations differ across investment horizons and whether horizon-aware rebalancing outperforms static benchmarks.
The research uses DCC-GARCH and wavelet local multiple correlation (WLMC) to examine the daily returns of water ETFs from July 2019 to April 2025. The DCC-GARCH model focuses on temporal correlation, while the WLMC method decomposes correlations across different time scales. The sample is partitioned 70%/30% into in-sample (for estimating correlations and constructing rules) and out-of-sample (for portfolio evaluation). The author constructs DCC and WLMC-guided portfolios, rebalanced monthly and compares them with equally weighted (EW) and static minimum-variance (MV) benchmarks. Performance is evaluated using annualized return, volatility, Sharpe ratio, Sortino ratio (MAR = 0) and maximum drawdown.
MGARCH-DCC shows relatively low correlations at short horizons. WLMC confirms that low correlations persist up to about 32–64 days. These patterns suggest that water-themed ETFs offer some diversification potential at short horizons, although long-term comovements limit diversification benefits. Using DCC-GARCH/WLMC with monthly rebalancing achieved higher annualized returns and Sharpe ratios compared to MV and EW benchmarks. The results indicate a modest yet meaningful potential for horizon-aware, correlation-guided allocation among water-themed ETFs.
Future research should incorporate a broader range of ETFs and directly link ESG scores with financial performance.
The findings demonstrate how institutional investors may channel funds to water infrastructure to be in accordance with SDG 6, while enhancing the resilience of their portfolios. Using the proposed horizon-aware rebalancing rules allows investors to achieve higher risk-adjusted returns.
Investing in companies working to bring solutions to water stress contributes indirectly to financing one of the most important challenges faced by over four billion of people around the word. Even though the impact is not straightforward, investors are aligned with SDG 6. The ETFs’ performance does not imply a direct measurable impact on access to water. The paper findings support that blue finance investment may contribute to social equity.
Even though the DCC and WLMC were used in previous research, the proposed methodology is showing novelty in the way they can be mobilized to bring insights into portfolio construction. The rebalancing frequency is provided by the multi-wavelet, while the DCC is used to optimize the portfolio weights. The strategy clarifies when within-theme diversification is the most plausible.
