Hydrogen ETFs to fuel tomorrow's economies

Germany and Egypt announced that they reached an agreement around the hydrogen economy. According to German Chancellor Olaf Scholz, the two nations will combine their efforts to build the hydrogen economy as Europe attempts to diversify away from its dependence on Russian gas. After meeting Egyptian President Abdel Fattah Al Sisi, he stated that electricity and hydrogen are becoming increasingly crucial for the transformation of industry in Germany and other countries. Scholz emphasized the importance of diversification, having numerous good partners instead of relying on one partner. In that context, the opportunity is presented to gas exporting countries since much of Germany’s hydrogen needs must be imported. 

On another front, a breakthrough in green hydrogen technology – energy generation and storage – has been announced by EPRO Advanced Technology (EAT). The company developed an innovative material that can generate ultra-pure hydrogen from a water source on demand. The porous silicon material, Si+, can be used in many applications. Most notably, it acts as a solid-state hydrogen generating material which is compact, robust, and easily transportable. This technology facilitates phasing out of the diesel power generating sets. Moreover, it can act as an ideal replacement for marine fuel oil, offering a thermal energy storage solution through exothermic heat released during the Si+ hydrogen generation reaction. Most importantly, Si+ is seen by industry pundits as an easy and low-cost means to transition to the hydrogen economy.  

Hydrogen Economy in a Nutshell 

Hydrogen is a gas that can be employed as an energy source that emits zero greenhouse gases. The only byproduct of hydrogen combustion is water vapor making it a cleaner and more environmentally friendly alternative to fossil fuels like coal, oil, and natural gas.

However, that could change in the coming years. Several companies are working hard to tap into the enormous potential for this potentially emission-free fuel.

The hydrogen economy is a futuristic view of the world where economies rely primarily on hydrogen. This is a world where hydrogen, the commercial fuel, delivers a substantial fraction of any nation’s energy and services. If materialized, the hydrogen economy would reduce energy consumption and emissions. It will stimulate economic growth in different market segments while bringing about new jobs and helping in reducing unemployment. Even this futuristic view of the economy must overcome many challenges such as technical bottlenecks, competition with optional technologies, and interrelation with technology strategies, to name a few.

One of the significant drawbacks of hydrogen as a fuel source is that it is rarely found in gaseous form. Even though it can be produced from various sources, some methods emit greenhouse gases. Another major obstacle before achieving a hydrogen economy is producing the gas from domestic energy sources in a sustainable fashion, economically and environmentally. 

Increasing Demand for Hydrogen

The International Energy Agency (IEA) stated in a report that the hydrogen demand reached approximately 90 Megatons (Mt), with almost 77% being used as pure hydrogen. At the same time, the remainder was mixed with carbon-containing gases in methanol production and steel manufacturing. 

In the case where Net Zero Emissions are reached by 2050, hydrogen demand from industry is expected to expand 44% by 2030, with low-carbon hydrogen becoming increasingly important (amounting to 21 Mt in 2030), according to the same report. The current project pipeline analysis suggests that only 18% of this demand would be met. Rapid action is clearly needed in the next ten years to meet projected Net Zero Emissions by 2050.[1]

Hydrogen in Public Markets

Investors who are bullish or seeking exposure to the Hydrogen Economy can directly invest in and purchase hydrogen producers, companies producing electrolyzers and fuel cell companies. This comes with the assumption that buying these assets will grow in popularity, facilitating their sale at a higher value. 

Alternatively, investors can indirectly gain exposure to the Hydrogen Economy by purchasing stocks of companies producing hydrogen-powered buses, vehicles and large industrials jumping onto the hydrogen train as an equity investment. 

Likewise, Hydrogen Economy exchange-traded funds allow investors to overcome the complexities of picking individual securities. They provide investors with an easy and convenient way to gain exposure to the future economy. They bundle different hydrogen stocks together in a single basket, trading on national and international stock exchanges under a specific ticker symbol.

Hydrogen Economy ETFs

Trackinsight has developed a proprietary Thematic Investing classification that is structured based on 3-tiers. This taxonomy facilitates ETF research using a transparent framework. The three-tiered methodology maps each ETF against 5 Megatrends, 12 Trends and 68 Themes. Hydrogen ETFs aim to isolate a niche market segment and narrow the focus to a specific theme. This case is ‘Hydrogen Economy’. 

The theme belongs to the ‘Alternative Energy’ trend, which captures the investment opportunity in any of these three megatrends: Technology Innovation, Rising Urbanization, and Environmental Changes.

Trackinsight's Thematic ETF Screener identifies 10 ‘Hydrogen Economy’ ETFs available to investors. Interestingly, all ten products are aligned to the Sustainable Development Goal (SDG) number 7, also known as ‘Affordable and Clean Energy.’ They follow an ‘ESG Thematic’ strategy focusing on one sustainability theme. Investments can address one or more pillars of the ESG while tracking the main theme or "quasi sector," such as Hydrogen Economy in this case.

Below is a breakdown of the largest Hydrogen Economy ETFs available to investors, as measured by assets under management.

L&G Hydrogen Economy UCITS ETF (HTWO)

The L&G Hydrogen Economy UCITS ETF (HTWO) is the world’s first and largest Hydrogen Economy ETF. Assets under management reached USD$485 million[2] while attracting USD$138 million of investor capital year-to-date. This fund is designed to track the performance of the Solactive Hydrogen Economy Index, which invests in a basket of companies that are actively engaged in the hydrogen industry. HTWO can help in portfolio diversification, allowing investors to express their view on hydrogen value chain equities such as the production of the following: hydrogen, hydrogen distribution infrastructure, production of fuel-cells, supply of fuel-cell components, hydrogen-based energy storage, fuel-cell electric vehicles, hydrogen-based transportation, hydrogen technology owners, and hydrogen-based applications. It invests in 30 stocks spanning five different sectors: 52.9% in Industrials, 27% in Materials, 8.3% in Consumer Discretionary, 7.3% in Utilities, and 4.5% in Information Technology. On the securities level, this fund is not as diversified as on the geographical level, as the top 10 holdings constitute 44.8% of the portfolio. HTWO has 28.9%[3] of total assets invested in the United States, 12.35 in Japan, 11.0% in South Korea, 10.3% in the United Kingdom, and the remaining spread across more than six countries. HTWO costs 0.49% a year to own while following a capitalization policy where it reinvests generated income. 

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[1] Hydrogen – Analysis - IEA

[2] Fund AUM and flow data is as of July 18th

[3] Fund holdings’ data is as of June 30th