The AI revolution, often heralded for its technological leaps, is hitting an unexpected roadblock: water. As data centers proliferate to meet AI’s insatiable demand, the sector is grappling with a fundamental truth: without water, there is no cooling, and without cooling, there are no data centers. This shift is transforming water and waste management from mundane utilities to critical AI infrastructure, reshaping investment strategies and community dynamics.
Local communities are increasingly pushing back against data center expansions, citing concerns over water usage, environmental impact, and long-term strain on local infrastructure. This NIMBY (“Not In My Backyard”) movement is forcing tech giants like Microsoft to rethink their approach. Microsoft’s recent commitment to being a “better partner” to communities, including responsible water usage and infrastructure investment, underscores the growing importance of these issues. As Senior Market Strategist John Rowland, CMT, notes, “The next phase of AI infrastructure investing won’t be about who builds the fastest model — but who can actually get data centers approved, cooled, and sustained in the real world.”
This reality is driving a shift in investment strategies. Rather than chasing mega-cap tech stocks, Rowland focuses on companies whose revenue growth is directly tied to filtration, recycling, and waste systems—equipment data centers need to operate under tighter scrutiny. This “picks and shovels” approach targets the underlying infrastructure that enables AI growth.
One investment vehicle highlighting this theme is the First Trust Water ETF (FIW). Unlike local water distributor ETFs, FIW’s holdings focus on companies involved in water treatment, filtration, recycling, and waste management. These are the areas under pressure as data centers scale. Technically, FIW has been range-bound relative to the S&P 500 Index ($SPX), but has recently turned positive. A breakout above the $116 area could further strengthen its case, offering diversified exposure to a theme the market is only beginning to price in.
Within FIW’s constituents, Watts Water Technologies (WTS) stands out. Watts manufactures valves, filtration systems, and flow-control equipment that enable large-scale industrial and data center operations to function efficiently and sustainably. On a long-term weekly chart, WTS exhibits the kind of structural strength Rowland looks for—a stock that has compounded quietly for years, largely outside the major indexes, and tied to unavoidable infrastructure demand.
This shift isn’t about predicting AI demand; that part is already obvious. The edge comes from understanding what must be built next for AI to keep growing, and who gets paid to make that possible. Water, recycling, and waste management aren’t optional. If data centers can’t solve these issues, they don’t get built. This trade sits at the intersection of AI growth, infrastructure spending, and mid-cap leadership—far away from crowded narratives and index concentration.
As the sector evolves, the focus on water and waste management will likely intensify. Communities will demand more from tech companies, and investors will seek out the companies that enable sustainable AI growth. This dynamic could spark innovation in water recycling and waste management technologies, driving efficiency and reducing environmental impact. Moreover, it could lead to more collaborative approaches between tech companies and local communities, ensuring that AI infrastructure development aligns with local needs and values.
The AI boom is far from over, but its trajectory is being reshaped by basic needs. As Rowland puts it, “This is exactly the type of leadership we are targeting as mega-cap indexes stall and capital looks for new homes.” The water and waste management sector is poised to play a pivotal role in the next phase of AI infrastructure development, offering both challenges and opportunities for investors, communities, and the tech industry alike.