Hydrogen stocks & ETFs
“Hydrogen” has become one of the buzzwords of 2021, as its energy potential hits the headlines. This potential is mainly as an energy “carrier” – hydrogen can possibly fulfil a similar role to that of batteries, by releasing at a later time some of the energy that was put into it. But it’s important to remember that hydrogen can only be made an energy source by having massive amounts of electrical energy applied to it. While it is the most abundant element in the universe, elemental hydrogen does not exist alone, and has to be isolated – most commonly, by breaking-down water – and it takes more energy to do this than can be produced by burning it. Hydrogen’s value comes from the fact that it can be stored and transported.
There is already a large hydrogen economy: hydrogen is mainly used today as an input for refining petroleum, treating metals, and producing fertiliser. Virtually all of this hydrogen is made using the methods of steam methane reforming or gasification. These methods are very fossil-fuel intensive, and hydrogen from them has come to be known as “grey hydrogen,” to denote this.
Other, cleaner methods have been proposed, or are in limited use. One is “blue hydrogen,” in which the carbon emissions from the manufacturing process are captured and stored – carbon capture and storage, or CCS. This could potentially reduce the carbon-dioxide emissions from the process by 85%–95%.
“Green hydrogen” is the one that has captured most of the attention in the last couple of years (there are other “colours” of hydrogen production), as the climate change case intensifies, and in the lead-up to (and wake of) the COP26 conference in Glasgow. The role of green hydrogen – in which the power used to make the hydrogen comes from an energy source classified as “clean” – could become globally massive.
Water electrolysis is the process of splitting water into hydrogen and oxygen using an electric current. Electrolysis occurs in a device called an electrolyser: if powered by wind or solar, the hydrogen is produced by a zero-emission process, and is called “green hydrogen.”
This is the kind of hydrogen that is filling the headlines; for example, in Fortescue Metals Group founder Andrew Forrest’s pledge to produce 15 million tonnes of green hydrogen by 2030, just nine years from now. That is many times the world’s current “green hydrogen” output, and will require huge amounts of investment. Forrest projects Fortescue Future Industries arm’s output increasing to 50 million tonnes a year thereafter.
These are ambitious plans, to put it mildly. Earlier this month, The Australian gave a sober (some would say pessimistic) summary here, which points out the eye-watering possible costs. The chief system design and engineering officer of The Australian Energy Market Operator (AEMO) has stated that producing green hydrogen at such a scale would require a renewable energy input between two to three times the total electricity consumed by the whole of Australia today.
Nevertheless, hydrogen is on a roll, and it has become a fully-fledged investment thematic. It could be a massive investment opportunity: Bank of America estimates that the roughly US$200 billion ($274 billion) industry will grow to US$11 trillion ($15 trillion) of investment and account for some 25% of the world’s energy needs, generating US$2.5 trillion ($3.4 trillion) in direct revenues by 2050.
With these types of numbers floating around, investors are looking for the best way into hydrogen.
Pure-play exposures are few and far between. I would read The Australian article linked to above before I invested in Fortescue Metals Group for this exposure. In March, I looked at some of the other ASX-listed hopefuls, stocks such as Hazer Group but these are quite small. This could be one of those situations where specialist funds are the best way into the specific theme.
The ASX already hosts several “clean energy” ETFs, for example:
- VanEck Vectors Global Clean Energy (ASX: CLNE)
- BetaShares Climate Change Innovation ETF (ASX: ERTH)
- ETFS Battery Tech and Lithium ETF (ASX: ACDC)
But if we’re talking hydrogen, the most targeted take is offered by the newest option – ETF Securities’ ETFS Hydrogen ETF (ASX: HGEN) – which listed in October. It’s the first pure-play hydrogen ETF, investing in global leaders in the hydrogen economy, offered to Australian investors on their home exchange, in a single stock, in which they can invest any amount of money. HGEN costs its investors 0.69% a year. The ETF is not currency-hedged, meaning that investors are exposed to the risk of exchange-rate fluctuations affecting their return on the fund (or augmenting it).
The HGEN companies mostly come from the US, the UK and South Korea.
The HGEN Top Ten
- Plug Power Inc. (12.0%)
- Bloom Energy Corporation (9.4%)
- Ballard Power (8.5%)
- ITM Power PLC (7.6%)
- FuelCell Energy (6.7%)
- Ceres Power Holdings (6.4%)
- Doosan Fuel Cell (6.3%)
- Doosan Corporation (4.4%)
- Linde PLC (4.4%)
- Air Products & Chemicals (3.9%)
HGEN costs investors 0.69% a year.
HGEN only listed on October 7, so doesn’t have much of a track record. But given that the first trades were struck at $10.09, HGEN’s rise to $12.86 – a 27.4% surge in six weeks, with a peak of $13.63 (up 35%) shows that Australian investors have been very receptive to the hydrogen story.
Given that if you invest in HGEN you are already taking currency risk – which could also work in your favour – there is nothing stopping you taking a look at US-listed ETFs built along the same theme, given that access to the US exchanges is very common with Australian online brokers, and with very competitive brokerage.
Two potential exposures are:
The Defiance Next Gen H2 ETF (NYSE Arca: HDRO), launched on the NYSE Arca exchange in March. The first hydrogen ETF offered in the US market, HDRO, at US$24.20, has lost 12.3% in unit price since its first trade – but is up 33% since the first week of October.
Defiance Next Gen H2 ETF (HDRO) Top Ten Holdings
- Plug Power Inc. (15.2%)
- FuelCell Energy Inc. (8.7%)
- Bloom Energy Corporation (7.8%)
- NEL ASA (7.2%)
- Ballard Power Systems (6.5%)
- ITM Power plc (5.2%)
- Ceres Power Holdings plc (4.9%)
- Powercell Sweden AB (4.9%)
- McPhy Energy SA (4.6%)
- Advent Technologies Hldgs. (3.8%)
HDRO costs investors 0.3% a year.
In July, HDRO was followed by the Global X Hydrogen ETF (HYDR), from ETF issuer Global X. At US$26.78, HYDR has gained 2.4% since its first trade.
Global X Hydrogen ETF (HYDR Top Ten Holdings
1. Bloom Energy Corporation (14.7%)
2. Plug Power Inc. (13.5%)
3. Ballard Power Systems (10.7%)
4. FuelCell Energy Inc. (10.1%)
5. Powercell Sweden AB (5.2%)
6. NEL ASA (5.1%)
7. McPhy Energy SA (4.6%)
8. AFC Energy plc (4.3%)
9. Ceres Power Holdings plc (4.0%)
10. ITM Power plc (4.0%)
HYDR costs investors 0.5% a year.
As is common with specific thematic ETFs, there is quite a bit of portfolio crossover: the top ten holdings look very similar. The ASX-listed HGEN is more expensive than its US-listed peers while offering very similar exposure. Dealing on the local exchange might swing the decision in favour of the ASX stock. Holding a highly specific ETF such as a hydrogen-devoted one means you’ll have a more volatile investment than a broader overseas-market ETF.
The “green hydrogen” theme certainly cannot be considered a no-brainer – there are big questions on costs and safety, for a start. But if it takes off to anywhere near the extent that many of its proponents believe, a hydrogen ETF could prove to be a very judicious investment.
James Dunn is a financial journalist. All prices and analysis at 22 November 2021. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.