How To Invest in Green Hydrogen (Hydrogen ETF Review)

Green hydrogen can be used to decarbonize hard-to-electrify sectors like steel-making and shipping. As adoption increases, it could be an interesting, though speculative, investment opportunity. Learn if you should invest.

SustainFi October 8, 2021

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Why invest in hydrogen

  • Hydrogen can be used to decarbonize hard-to-electrify industries like steel and cement-making
  • Hydrogen can fuel shipping, long-distance trucking and aviation industries
  • Hydrogen can store energy and heat homes

The most abundant element on the planet, hydrogen has been an alternative energy favorite for some time. It is a gas that burns clean, leaving only water. It was hydrogen that powered the first internal combustion engine two centuries ago, as well as NASA’s program to send the first man to the moon. But due to its prohibitive cost, hydrogen never took off and only accounts for 2% of energy use today.

With growing interest in renewables and countless net zero pledges, there is a renewed focus on hydrogen. The U.S. Department of Energy launched a plan to reduce the cost of “green” hydrogen by 80% by the end of this decade. And the European Union wants hydrogen to be the cornerstone of its net zero by 2050 plan.

Shipping, aviation, long-distance trucking, steel and cement-making are extremely hard to decarbonize. Lithium-ion batteries in electric cars weigh too much and take too long to recharge. And they are not used to decarbonize heavy industry.

Enter hydrogen, which can be used as a zero-carbon fuel for ships or trucks or as an input for zero-carbon steel. The Swedish steelmaker SSAB is already making zero-carbon steel using hydrogen. Hydrogen has even fueled an Italian pasta factory.

Car manufacturers knew of hydrogen’s potential for a long time. General Motors tested a hydrogen-powered Electrovan in 1966. Toyota has unveiled its prototype hydrogen car, Mirai, in 2014. Anglo American is developing a hydrogen-powered fuel cell mining truck, and Daimler and Volvo announced a fuel cell truck JV.

Hydrogen can also be liquefied and used to store excess wind and solar energy, a solution for intermittent energy supply. Utilities could use hydrogen during times of peak demand or make hydrogen when the energy supply is plentiful.

The cost of green hydrogen is coming down

  • Manufacturing hydrogen is energy-intensive, but the cost of renewable energy is coming down
  • The cost of electrolyzers, the tools needed to make green hydrogen, is also falling
  • IHS Markit says green hydrogen could be cost-competitive by 2030

Unlike oil or natural gas, hydrogen does not occur naturally and must be extracted. Most hydrogen used today, known as “gray” hydrogen, is extracted from fossil fuels like natural gas. According to IRENA, 96% of hydrogen is produced from oil, coal, or natural gas. The extraction process itself emits a lot of carbon dioxide, a greenhouse gas. Gray hydrogen is then used to make ammonia, a fertilizer, or to refine petroleum.

But there is a cleaner way of extracting “green” hydrogen. Tools called electrolyzers can make hydrogen from water by splitting it into hydrogen and oxygen. If this process is powered with renewables, it generates almost no emissions.

Green hydrogen should not be confused with “blue” hydrogen. “Blue” hydrogen is made from fossil fuels using carbon capture and storage to reduce emissions. Due to carbon leakage, it does not have the environmental benefits of green hydrogen.

For hydrogen to tackle climate change, it needs to be “green,” i.e., made without fossil fuels. Yet only 0.1% of the hydrogen produced today is green. So far, the cost of making green hydrogen has been prohibitive: it costs three to six times more than gray hydrogen.

But, as technology develops, costs will decrease. Rapidly declining costs of renewable energy – used to power electrolysis – are helping, too. According to IHS Markit, green hydrogen could be cost-competitive by 2030.

Hydrogen ETFs

Critics argue that it’s too early to invest in hydrogen, and yet, three hydrogen exchange-traded funds (ETFs) launched in 2021. Each owns roughly 30 hydrogen stocks. The funds haven’t yet attracted a lot of assets: combined, they have less than $100 million under management.

Three hydrogen ETFs

TickerHYDRHDROHJEN
FundGlobal X Hydrogen ETF Defiance Next Gen H2 ETF Direxion Hydrogen ETF
Date launched202120212021
Assets ($ million)143731
Expense ratio0.50%0.30%0.45%
Holdings262730
Top 3 holdingsPlug Power, Ballard Power, Bloom EnergyPlug Power, FuelCell Energy, Ballard PowerPlug Power, Linde, Bloom Energy

Global X Hydrogen ETF (HYDR)

  • Assets under management: $14 million
  • Holdings: 26
  • Expense ratio: 0.50%

Launched in July 2021, the Global X Hydrogen ETF (HYDR) invests in an index of companies involved in hydrogen production, technology, integration and fuel cells. To be included, companies must derive at least 50% of revenue from hydrogen. HYDR seeks to hold a portfolio of up to 40 pure-play hydrogen stocks, and each company is capped at 12%. Pre-revenue companies are capped at 2%.

HYDR has 26 investments, including the top three Plug Power, Ballard Power, and Bloom Energy. The top ten stocks are over two-thirds of this fund.

The fund has $14 million in assets and costs 0.50% ($50 annually on a $10,000 investment.)

Defiance Next Gen H2 ETF (HDRO)

  • Assets under management: $37 million
  • Holdings: 27
  • Expense ratio: 0.30%

Launched in March 2021, the Defiance Next Gen H2 ETF (HDRO) invests in an index of companies that derive at least 50% of revenue from hydrogen or fuel cells. The fund must own at least 25 stocks, and each stock is capped at 10% (4% for industrial gas.)

HDRO has 27 investments, including the top three Plug Power, FuelCell Energy and Ballard Power. The top ten stocks are over 60% of this fund. A lot of the holdings overlap with those of the Global X Hydrogen ETF (HYDR).

The fund has $37 million in assets and costs 0.30% ($30 annually on a $10,000 investment.)

Direxion Hydrogen ETF (HJEN)

  • Assets under management: $31 million
  • Holdings: 30
  • Expense ratio: 0.45%

Also launched in March 2021, the Direxion Hydrogen ETF (HJEN) also invests in hydrogen and fuel cell technologies. The fund typically holds a portfolio of 30 pure-play companies, each capped at 8% of the fund.

At the moment, the top three of the fund’s 30 holdings are Plug Power, Linde, and Bloom Energy. The top ten stocks are over 60% of the ETF.

HJEN has $31 million in assets and costs 0.45% ($45 annually on a $10,000 investment.)

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Green hydrogen stocks

Investing in hydrogen stocks is risky; many hyped-up stocks have already been through a boom and bust cycle. Despite high market capitalizations, many of these companies are far from being profitable.

Plug Power (PLUG) makes hydrogen-powered fuel cells, currently used to power forklifts. For example, they’ve made hydrogen-powered forklifts for Amazon and Walmart. But PLUG has a much bigger vision that includes green hydrogen plants and powering on-road vehicles and planes. However, today the company doesn’t generate a lot in revenue or profit, and its stock has been very volatile. 

San Jose, California-based Bloom Energy (BE) makes fuel cells that generate energy onsite. According to the company, Bloom Energy servers can convert natural gas or hydrogen into electricity without emitting much CO2. In 2020, BE partnered with Korea’s SK Group to sell hydrogen-powered fuel cells and electrolysis machines. Still, the company has yet to generate a profit, and its stock has been targeted by short-sellers.

Connecticut-based FuelCell Energy (FCEL) makes fuel cell power plants. But, despite running over 50 plants on three continents, the company is yet to turn a profit. 

Canadian company Ballard Power Systems (BLDP) makes hydrogen fuel cells for cars, trucks, ships, trains and buses. BLDP has recently announced partnerships with Siemens for trains and Tata Motor for buses. BLDP also remains unprofitable.

If you want to take less risk, you could consider old-school industrial gas companies that already play in the “gray” hydrogen market. Although they don’t generate much revenue from hydrogen today, they may be well-positioned to capture future upside.

Air Products & Chemicals (APDis an industrial gas company that is already supplying most of the world’s hydrogen. Today, most of it is “gray” hydrogen used in refineries and for fertilizer. Although hydrogen is a small business for APD, the company is focused on carbon-free hydrogen projects. They include a $5 billion hydrogen-based ammonia production facility in Saudi Arabia. 

Linde (LINis a German industrial gas supplier that sells oxygen, nitrogen, hydrogen, helium and other gases. The company is investing in the hydrogen value chain, including building the world’s largest electrolyzer.

🔔 Looking for other ways to invest in climate change solutions? Learn about wind and solar energy.