Hydrogen is a renewable energy source that has the potential to revolutionize transportation in the future. The hydrogen economy is a concept in which hydrogen is used to fuel vehicles instead of gasoline or diesel. It’s an important element of the hydrogen fuel cell industry, and companies are attempting to develop effective and trustworthy hydrogen ETFs.
The hydrogen economy is slowly but surely taking shape, and there’s no better example of this than the growing popularity of hydrogen ETFs. These funds are designed to track a portfolio of hydrogen-related companies, and investors are flocking to them in droves.
Because the hydrogen market is still in its early days, there’s a lot of opportunity for growth. So, if you’re interested in investing in this transformative technology, this write-up is for you. Keep on reading to learn about hydrogen ETFs.
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Trackinsight has created a unique thematic investing list with three categories. This taxonomy promotes ETF research by providing a clear structure. Each ETF is mapped to 5 megatrends, 12 trends, and 68 themes using a three-tiered technique.
Hydrogen ETFs seek to isolate a certain market sector. This is the ‘Hydrogen Economy’ example. The thematic ETF from Trackinsight looks at ten ‘Hydrogen Economy’ ETFs that are currently available to investors.
Surprisingly, all ten are in line with Sustainable Development Goal (SDG) 7, popularly known as “Affordable and Clean Energy.” They employ an ‘ESG Thematic method that focuses on a single sustainability subject. Investments can target one or more ESG pillars while monitoring the main subject or ‘quasi sector’.” The hydrogen economy, in this case.
Our hydrogen economy stocks theme has enjoyed a strong rebound in recent months, climbing about 40 percent since our last update in late June. It comprises stocks of publicly traded firms in the United States that deal in hydrogen fuel cells, associated renewable energy equipment, and hydrogen gas. The theme is also up nearly 11 percent year to year, outpacing the wider S&P 500, which is down around 11 percent during the same period.
Several elements have contributed to the theme’s recent outperformance. To begin with, there’s the Inflation Reduction Act, which includes around $370 billion in credits and subsidies for investment in clean, renewable energy in the USA.
The act was approved by the House in the second week of August and submitted to the President for signature. According to Wood Mackenzie, this is the largest-ever investment to combat climate change, and it may result in up to $1.2 trillion in investments by the private sector in renewable energy by 2035.
Furthermore, the Russian-Ukraine war and other geopolitical challenges have caused an increase in energy costs. Energy price increases and uncertainty over gas supply are serving as a wake-up call for energy-importing countries, notably in Europe. This turmoil is potentially hastening the transition to renewable energy, such as hydrogen.
Also, macroeconomic variables may be at work. Over the previous two quarters, the United States’ GDP has decreased while inflation has slowed somewhat to around 8.5 percent in July. This might prompt the Federal Reserve to ease up on rate increases, thereby benefiting high-growth futuristic themes like hydrogen.
There are risks, however. Although hydrogen has long-term promise for decarbonization and reducing reliance on fossil fuels, it remains a long-term gamble given the current high prices and lack of scale.
Bloom Energy, a manufacturer of solid oxide fuel cells, has shown top performance with its stock up 37 percent year to date. The performance of FuelCell Energy, which develops, builds, and operates fuel cell power plants, has been poor, with its stock down roughly 12 percent year to date.
While both hydrogen stocks and ETFs are potentially explosive, there are reasons why you should invest in hydrogen ETFs rather than hydrogen stocks. There are some differences between stocks and ETFs, with some advantages and disadvantages of their own.
Let’s briefly discuss stocks and ETFs to clear up why investing in a hydrogen ETF is better than investing in hydrogen stocks:
Stock: In the case of a publicly traded firm, a stock represents a fractional ownership stake in the company and normally trades on an exchange. When you buy a stock, you’re betting on the success of one firm – and only one.
Stocks may rise and fall in the short term for a variety of reasons, and market sentiment frequently dictates how a stock might perform day to day. However, in the long run, a stock closely tracks the company’s growth. As the company’s earnings grow, the stock tends to climb as well.
ETF: ETFs are asset pools that often include stocks, bonds, or a combination of the two. A single ETF may hold dozens of equities. Investors can obtain an indirect investment in all of the stocks owned by the fund by purchasing a single share of the ETF. It’s an excellent approach to acquiring a stock portfolio.
ETFs frequently invest in equities with a specific focus, such as large firms, value-priced stocks, dividend-paying companies, or those in a specialized industry, such as financial corporations. Some specialist ETFs may help you generate larger returns.
Now let’s take a look at why you should buy a hydrogen ETF instead of hydrogen stocks:
Individual investors would need weeks to conduct adequate due research on each of those companies, which is one of the benefits of ETF investment. Because the influence and relevance of any one stock is generally minor, investors can spend time considering whether sectors and markets are primed to succeed and make investment decisions without getting weighed down by a mountain of initial and continuing research.
ETFs can be less expensive to hold and trade than individual equities. Many major brokerages now provide a range of ETFs that can be traded commission-free, giving them a cost advantage over individual equities. Many ETFs, like hydrogen ETFs, have lower yearly charges than equivalent mutual funds and might be less expensive to own.
While it is feasible to find high-quality mutual funds with modest minimum initial investment requirements, ETFs do not have any. If someone has $100 to invest and an account with a broker that provides free ETFs, that money may be put to work right away. Similarly, there is no minimum required amount for further contributions or maintenance.
Pair trading is only available to knowledgeable investors, but it is another approach that ETFs can facilitate. Pair trading is the practice of purchasing one investment and simultaneously selling another. The objective is to benefit from the disparity in fortunes between the two firms, but investors can pair-trade using ETFs by purchasing and taking an opposing position in a specific company that they feel will perform variably in the future.
As you can understand, a hydrogen ETF offers so much more compared to hydrogen stocks. ETFs have always been better than stocks, hydrogen ETFs and stocks are no exception.
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The L&G Hydrogen Economy UCITS ETF seeks to monitor the Solactive Hydrogen Economy Index NTR’s performance. The aim of this fund is pretty straightforward: a long-term megatrend with the potential to change our way of life, how we work, and our energy consumption.
It aims to capitalize on the worldwide hydrogen industry’s massive growth potential. An index-tracking investing approach backed by a hydrogen specialist team. L&G hydrogen economy UCITS ETF also has some clear-cut objectives. The fund invests in firms that contribute to environmental goals, do not materially undermine any environmental or social goals, and adhere to good governance standards.
The index is intended to give exposure to equity shares of worldwide enterprises involved in the hydrogen economy. The utilization of hydrogen as clean and renewable energy to satisfy the world’s energy demands is referred to as the “hydrogen economy.”
The Index Universe is made up of enterprises that are actively involved in the hydrogen industry’s value chain, which encompasses activities that create value within the hydrogen economy, such as energy input, transportation, storage, production, transportation, storage, and end-use.
A corporation is eligible for inclusion in the index if it is of adequate size and liquidity. Furthermore, the index excludes companies that: (a) derive significant revenues from coal mining (b) are involved in the production of controversial weapons, or (c) have been accountable for breaching at least one of the UN Global Compact principles.
The UN global compact principles is a set of globally accepted standards on human rights, labor, the environment, and corruption for a continuous period of three years. The universe of firms from which the index is chosen is updated twice a year.
All index members are weighed equally within the index, with specific liquidity-based weight limitations in place to ensure that securities with lesser liquidity are not unduly represented in the index. Each company’s weight is checked weekly. If any firm exceeds 15 percent of the index, the weights of all firms are changed such that they are again evenly weighted inside the index.
The L&G Hydrogen Economy UCITS ETF (HTWO) is the first and largest Hydrogen Economy ETF in the world. To this day, assets under its administration have reached nearly $500 million, with investor money totaling USD$138 million. This fund is intended to mirror the performance of the Solactive Hydrogen Economy Index.
It is a diverse group of firms involved in the hydrogen sector. HTWO can aid in portfolio diversification by allowing investors to express their views on hydrogen value chain equities, such as hydrogen production, hydrogen distribution infrastructure, fuel-cell electric vehicles, hydrogen technology owners, fuel-cell production, fuel-cell component supply, hydrogen-based transportation, and hydrogen-based applications.
It invests in 30 stocks from five distinct industries: industrials accounted for 52.9%, materials accounted for 27%, consumer discretionary accounted for 8.3%, utilities accounted for 7.3%, and information technology accounted for 4.5%.
This fund is not as diverse in terms of securities as it is in terms of geography, with the top ten holdings accounting for 44.8% of the portfolio. HTWO has 28.9% of its total assets invested in the United States, 12.35 percent in Japan, 10.3% in the United Kingdom, and 11% in South Korea. The rest is divided among more than six nations. HTWO costs 0.49% per year to buy due to its capitalization policy of reinvesting earned income.
As hydrogen equities rode the green energy parade of 2020, ETFs were formed to provide exposure to a potentially substantial component of the future energy mix, but does the hydrogen economy story have enough traction to be more than wishful thinking?
The L&G Hydrogen Economy UCITS ETF (HTWO), Europe’s first focused product, is front and center in displaying some of the tailwinds and headwinds facing its underlying subject. HTWO’s largest allocation at the time was a 22 percent stake in FuelCell Energy. The stock has risen from $3 to $28 in less than three months.
Demonstrating analysts’ concerns about hydrogen being the next big thing, FuelCell shares have plunged 56 percent in the seven weeks to a little over $12, although remaining above JP Morgan’s $10 target price. This type of volatility is common across many energy transition themes, emphasizing the adage that timing is everything.
A new analysis by JP Morgan Cazenove determined that the hydrogen ‘revolution’ may be here to stay, and so the recent correction should not be considered a curtain call for the theme, which helps to alleviate present valuation and volatility worries.
JP Morgan stated that hydrogen-related enterprises are being supported by legislative pledges from blocs such as the EU, as well as corporate emissions reduction efforts pushing hydrogen investment. A longer-term issue for hydrogen is the role it will play in the future energy mix, as opposed to the electric alternatives in transportation and home heating, among other things.
Sectors such as ammonia, steel, and heavy-duty vehicles are projected to lead the hydrogen transition, according to JP Morgan. Areas that are adopting technology, such as refining and ammonia, will likely proceed at the fastest speed and the lowest cost, while EU steel makers have already set firm volume objectives for hydrogen-derived steel production by 2030.
According to JP Morgan, hydrogen presently lags in areas such as cement manufacturing and power generation. Furthermore, the business discovered that hydrogen grid-scale energy storage is costlier than alternative storage methods, and hydrogen fuel cell costs must be reduced by roughly 45 percent to compete with internal combustion engines.
Overall, the company is optimistic about potential cost savings in ‘blue’ and ‘green’ hydrogen, as well as electrolyzer manufacture. Blue hydrogen will stay cost-competitive until 2030 if carbon capture policies remain supportive, according to the business, but investors must be realistic.
If investors continue to back hydrogen, the question of which instrument to use comes into play. According to Peter Sleep, hydrogen ETFs encounter the same conundrum as other thematic categories: balancing over-concentration in a limited number of pure plays with increasing granularity by investing in firms where the ETF’s theme is not the key business.
Peter Sleep is a senior portfolio analyst at 7IM. This trade-off is exemplified by Legal & General Investment Management’s (LGIM) HTWO. It invests in firms with only minor hydrogen exposure, such as Toyota and Hyundai and will thus be influenced by variables unrelated to the exposure it seeks.
On the other hand, it debuted with a 22 percent weighting in a single stock and a cumulative 28 holdings. Because of this restricted concentration, investors are susceptible to large single-stock bets. While this trade-off is difficult to reconcile, Bloomberg’s Psarofagis believes that specific themes, such as hydrogen ETFs, provide a more solid foundation for ‘dark green’ exposure.
Overconcentration and over-diversification into non-hydrogen corporations are risk considerations, but future hydrogen growth may see companies grow in size and quantity, increasing the quality and size of ETF component lists.
From the above discussion, you can clearly understand that the decision to invest in hydrogen ETFs is based on an individual’s assessment of the relevance of hydrogen in the future energy mix. However, it is safe to assume that buying L&G hydrogen economy UCITS ETF will be a choice you won’t regret.
At this stage, the hydrogen ETF market is still very small, with only one fund available. If you are bullish on hydrogen and have plans to invest in this niche segment, it is better to wait for a few months as the sector takes off. After all, when an industry becomes popular over time, it can be quite volatile!
Overall, though, 2023 may see more activity in the hydrogen space. After all—with advancements made in battery technology and research—it is hard to ignore how central hydrogen could become in our automotive world. The hydrogen ETF has witnessed a price hike of almost 800 percent since then. The bear market that started in the last quarter of 2018 is expected to continue for a few more quarters.