HJEN - HJEN: A Subtle Way To Invest In The Future Through Hydrogen

2023-03-18 04:22:51 ET

Summary

• HJEN provides exposure to companies involved in the hydrogen economy that includes its production, distribution, storage and use as an energy source.
• This ETF has exposure to 30 companies in 5 hydrogen-related sub-themes, which collectively lead the way towards net-zero emissions.
• HJEN is an intriguing long-term way to access an investment into a better future. But this ETF is not currently at an attractive enough entry point for me.

by Sweta Shah

The Direxion Hydrogen ETF (HJEN) is a thematic ETF that tracks the Indxx Hydrogen Economy index. This ETF covers a set of stocks that operate across the hydrogen value chain, including fuel cell manufacturers, hydrogen producers, hydrogen storage companies, and fuel cell system integrators.

Unlike other ETFs which have a broader focus on clean and renewable energy industries, this ETF concentrates only on the hydrogen industry. This makes HJEN a true "pure play" on a promising and rapidly-growing energy source, one which will play an important role in the long-term transition to a low-carbon economy.

I rate HJEN a Hold. As the prices of hydrogen and other commodities continue to fluctuate due to changes in government regulations, competition from other forms of energy sources and overall performance of the global economy, uncertainty and risk is too high for me to be more bullish. This ETF is concentrated in a limited number of companies and the hydrogen industry is still in its early stages. This makes it difficult to forecast its long-term prospects, and that of the companies that operate within it.

Strategy

Despite its simple chemical structure, hydrogen is a complex and costly element to use in clean energy. Innovative and affordable hydrogen applications are crucial for wider adoption. Bloomberg's Adithya Bhashyam explains that "hydrogen is necessary for 100% net-zero emissions due to its unique properties." While clean energy ETFs exist, few are solely focused on hydrogen, making the interest in this sector high.

Holding Analysis

HJEN typically has exposure to about 30 companies across 3 economic sectors. It currently allocates 25% of its funds in the basic materials, 53% in industrials and 22% in energy. Top 25 holdings make up 97% of the ETF's assets, and about 20 companies truly drive the fund's price direction. HJEN's allocation by capitalization size is like a barbell. Nearly 50% is in large cap and 40% in small cap, with mid cap stocks making up the rest.

Strengths

The hydrogen industry is expected to play a significant role in the transition to a low-carbon economy, and HJEN offers a broad range of companies involved in the production, storage, and distribution of hydrogen. It provides a way to have an exposure in a growing industry that has the potential to long term growth. This is an index ETF, but it rebalances quarterly. That keeps the holdings fresh, and avoids too much being allocated to recent strong performing stocks.

Weaknesses

HJEN is a relatively new ETF and has only been trading since 2021. This limited trading history makes it difficult to assess the long-term performance of the ETF and may make it more challenging to predict its future performance. As the hydrogen industry is also relatively new and evolving rapidly, it adds up to potential volatility of HJEN. The chart below shows that since the start of 2022, its monthly standard deviation is nearly 3 times that of the S&P 500, at a striking level of more than 11%. That is volatile, even considering that the broad market converted from bull to bear over this time frame.

Opportunities

HJEN is a way to get involved in the hydrogen value chain that until recently, was difficult for retail investors to access. HJEN's methodology is to identify companies with strong fundamentals and long-term growth potential. So, investors get a combination of a unique industry and the stronger stocks in it. This makes HJEN an ETF that investors can consider to ride the coattails of long-term growth in renewable energy.

Threats

This ETF's concentration to the single investment theme is certainly its most obvious threat. This may result in a higher level of risk than a more diversified portfolio. The hydrogen industry may grow as many expect, but it may run into hurdles and fail to meet expectations. That risk will be more identified over time, providing clarity to investors. However, it is not an immediate-gratification situation.

Conclusions

ETF Quality Opinion

HJEN makes our watchlist because it is an industry with high growth potential longer-term. It might even have some use as a tactical position, given its sensitivity to the commodity complex.

ETF Investment Opinion

Despite my long-term enthusiasm, HJEN is a Hold for now. The price of this stock group is in a downtrend along with the broader stock market. There will be an opportunity to buy this ETF at a more opportune time.

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