ETFs

Hydrogen Hype Could Bring Back Hope for ETFs

Wind farm on a grassy landscape
Credit: Anselm - stock.adobe.com

A new era of energy output and consumption is upon the world, and perhaps not surprisingly, exchange traded funds issuers are responding.

Today, the roster of ETFs addressing renewable energy concepts is chock full of funds and it keeps growing. Gone are the days when all investors had to choose from were some broad renewable energy funds and some single-industry fare, including solar and wind.

The new generation of renewable energy ETFs is nearly as inventive as the industry itself. More nuanced concepts are being addressed too, including hydrogen. Prior to March, there were no dedicated hydrogen ETFs. Today, there are three, the newest of which is the Global X Hydrogen ETF (HYDR). HYDR made a debut last month.

Some new thematic ETFs, the realm where hydrogen funds dwell, attract questions about the validity of the underlying investment thesis. Those concerns are warranted, but at a time when fighting climate change is more important by the day, the hydrogen investment thesis is all the more credible.

“Globally, 131 large-scale projects have been announced since February 2021, taking the total to 359 projects,” according to the Hydrogen Council. “The total investment into projects and along the whole value chain amounts to an estimated $500 billion through 2030.”

Rethinking hydrogen applications

Currently, much of the renewable energy conversation revolves around power generation for homes and businesses. Indeed, there's growth to be had on those fronts as renewables made up about 20% of consumed power at the end of 2019, an indication that there's still work to be done.

Complementing solar and wind as sources of renewable energy is necessary to drive ambitious global decarbonization goals, and hydrogen can play a pivotal role in that scenario. Hydrogen is actually the lightest, most abundant element, indicating that it has desirable clean energy properties. But its primary uses today are exceptionally carbon-intensive. Think oil refining, fertilizer production and metals treatment.

However, HYDR has clear opportunities to deliver to investors a refreshed view of clean energy investing because hydrogen is increasingly relevant in carbon capture.

“Current production methods can use carbon capture, and storage (CCS) to reduce emissions, possibly by 85-95% in the future,” according to Global X research. “Hydrogen produced in this way is called 'blue hydrogen.'”

To pave the way for long-term upside, HYDR components, as counterparts in other renewable fields have done, must conquer the issue of costs. While costs for other renewable sources are declining, green hydrogen – the variety with superior clean energy potential – is pricey to produce.

“Producing green hydrogen is expensive,” notes Global X. “As of March 2021, green hydrogen costs between $3-$6.5/kg to produce compared to $1.80/kg for grey hydrogen and $2.40/kg for blue hydrogen.”

As solar and wind prove, there's an inverse relationship between costs and adoption. As the former declines, the latter rises. Fortunately for HYDR holdings, green hydrogen costs, though still elevated, are declining.

Storage wars

To be fair, some of the air has come out of the clean energy trade this year as U.S. politicians haven't been able to cobble together a spending package that appeases renewable supporters and investors.

That, however, isn't an obituary for HYDR holdings. The fund is positioned to capitalize on strength in mid-cap stocks as the weighted average market capitalization of its components is $10 billion.

Looking further out, hydrogen has a real chance to make inroads in the vital energy storage segment because it retains energy in superior fashion and can adapt to seasonal demand trends better than grid-scale lithium-ion batteries.

Those factors offer “benefits beyond just providing on-demand energy; it can help stabilize electricity prices, which improves cost recovery and enables further capacity additions,” says Global X.

“At the same time, these synergies could drive further economies of scale for green hydrogen as renewable energy producers invest in electrolyzers to increase H2 storage capacity,” Global X adds.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Todd Shriber

Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.

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