Thematic and sub-sector specialist Defiance ETFs has launched the first US-listed ETF to target companies involved in the development of hydrogen-based energy sources and technologies.
Bank of America estimates that hydrogen will generate roughly a quarter of the world’s energy needs by 2050.
The Defiance Next Gen H2 (HDRO US) is available to trade on NYSE Arca and comes with an expense ratio of 0.30%.
Paul Dellaquila, President of Defiance ETFs, commented: “We’re already starting to see hydrogen take on a larger role as a viable energy source.
“We believe that as governments and corporations continue to demand renewable energy sources and adopt more environment-friendly policies, hydrogen will be a pivotal resource to help fuel a cleaner economy.”
The fund achieves its desired exposure by tracking the BlueStar Global Hydrogen & Next-Gen Fuel Cell Index.
“Hydrogen-based energy solutions have enormous potential to support the electrification of a wide range of industries. Our index is unique in that it is the only hydrogen-related index that seeks to include only pure-play companies giving investors pure and rules-based exposure to this emerging theme,” said Josh Kaplan, Global Head of Research at MV Index Solutions, the creators of the index.
Methodology
The index selects its constituents from a universe of stocks listed on exchanges that are freely accessible to international investors – most notably, this excludes China’s domestic equity market. Eligible constituents must have market capitalizations above $150 million and average daily trading volume of at least $1m.
The methodology is focused on pure-play companies, those deriving more than half of their revenue from hydrogen and fuel cell projects or the development of hydrogen and fuel cell technologies, but also includes a small component of non-pure-play firms that are considered to have the potential to be serious players in the hydrogen energy market. Vehicle manufacturers are not eligible for inclusion.
The combined weight of pure-play companies is set at 85% with non-pure-play firms accounting for the remaining 15%. Within each category, constituents are weighted by float-adjusted market capitalization while capping the total index weight of any single stock at 10% and the aggregate weight of all stocks above 5% at 50%.
The index is reconstituted and rebalanced on a quarterly basis with buffer rules helping to limit unnecessary turnover.
Stocks from the US currently account for a third (34.2%) of the total exposure, while the UK (13.9%), South Korea (11.2%), Canada (10.2%), and Norway (8.1%) also have significant weights. Approximately two-thirds of the index is allocated to companies classified in the hydrogen & fuel cell sub-sector with the remaining weight allocated to firms classified in the industrial gases and hydrogen generation equipment sub-sectors.
The index is relatively concentrated, presently consisting of just 25 holdings. The top five names account for 46% of the total exposure. They are Plug Power (13.6%), Fuelcell Energy (11.6%), Ballard Power Systems (7.5%), ITM Power (6.9%), and Nell (6.5%).
Investment case
Hydrogen is the most abundant atom in the universe and it functions both as a fuel and an energy carrier. It does not occur naturally by itself but rather needs to be separated from compound elements with electrolysis (passing electricity through water in order to separate atoms) emerging as the preferred method of extraction.
Defiance notes that the falling cost of renewable energy and electrolyzers has opened the door for large-scale hydrogen production and commercial viability. Furthermore, the challenge of safe and effective storage for hydrogen has largely been met due to recent technological advances.
The growth of the hydrogen industry is also expected to be reinforced by government policies and incentives as the world shifts away from fossil fuel energy. Biden’s election to US President has further propelled the green agenda to the fore with the US and EU both pledging to be climate-neutral by 2050, while China and Japan are also actively supporting hydrogen research.
Applications for hydrogen fuel continue to be developed from power generation and grid balancing to industrial fuel, feedstock for industry, transportation fuel, heating, aerospace, and shipping.
Analysts at Bank of America have compared the current phase of the hydrogen market to smartphones pre-2007 and the internet pre-dot.com. They estimate that hydrogen will generate roughly a quarter of the world’s energy needs by 2050 and will create as much as $11 trillion in investment opportunities over the next three decades.
European investors can access the hydrogen economy investment theme through an ETF introduced by Legal & General Investment Management last month. The L&G Hydrogen Economy UCITS ETF (HTWO LN) tracks the Solactive Hydrogen Economy Index and comes with an expense ratio of 0.49%. It currently houses $220m in assets.