HYDR - HJEN: Not Yet A Buy But Our Preferred Choice To Play The Hydrogen Wave

2023-07-19 07:21:01 ET

Summary

• Hydrogen adoption is expected to increase this century, particularly in industries resistant to electrification, as part of efforts to achieve net zero emissions by 2050.
• The Direxion Hydrogen ETF offers investment opportunities in the hydrogen economy, with a portfolio of 30 pure-play stocks involved in hydrogen production, storage, fuel cell and battery systems, and more.
• Despite being less popular than the HYDR, we feel HJEN is the more compelling bet of the two.
• The risk-reward on the charts suggests that a Buy position at this juncture wouldn't be too rewarding.

Introduction

As we progress through this century, hydrogen adoption will likely become a more common theme, particularly given its useful qualities in helping decarbonize the globe's energy systems. There are quite a few industries such as aviation, naval, heavy industries, high-heat manufacturing, fertilizer production, etc. that will likely remain obdurate to the waves of electrification, and that's where hydrogen's presence will be felt most keenly. All in all, if we are to hit net zero emissions by 2050, it is all but certain that we'd have an ever-growing hydrogen economy playing a vital part in that narrative.

If you're intrigued by the growing scope of the broad hydrogen economy and are looking for suitable options, you may consider looking at the Direxion Hydrogen ETF ( HJEN ), which is one of two ETFs that investors could potentially pursue.

Portfolio Construction

As part of HJEN's initial screening process, prospective stocks, including ADRs (these stocks need to have a minimum market cap of $100m and a 6-month average daily turnover of over $ 1 million) need to be involved in one, or all of some of the hydrogen-related sub-themes listed below.

Hydrogen Production & Generation Hydrogen Storage & Supply Fuel Cell & Battery Hydrogen Systems & Solutions Membrane & Catalyst

Do note that it isn't sufficient to have just tenuous exposures to these hydrogen sub-themes. Rather, HJEN's screeners also seek to identify if these are "pure-play" stocks (hydrogen-related revenue should comprise at least 50% of the group topline), "quasi-play" stocks (hydrogen related revenue exposure of 20-50%), or "marginal-play" (less than 20% revenue exposure to the hydrogen theme).

Eventually, the top 30 pure-play stocks by market cap make up HJEN's portfolio, and if they can't find 30, they will dip into the quasi-play pool, with preference given to larger stocks (by market cap) and those involved in the first three hydrogen sub-themes.

Even though this is a US-based product (30% of holdings), note that the bulk of the holdings is based in Europe (~42% exposure), with some exposure to Asia-Pac stocks as well (24%).

HJEN versus HYDR

As noted earlier in the article, investors also have the option of pursuing an alternative ETF that seeks to profit from the growing profile of the global hydrogen industry- The Global X Hydrogen ETF ( HYDR ) which tracks a slightly smaller portfolio of only 26 stocks.

Despite coming to the bourses three months after HJEN, HYDR appears to be the more popular product in this space, with an AUM of over $47m compared to $31m for HYDR. Investors will have their unique reasons for gravitating to a certain product, but when we compare the ETFs, we feel HJEN is a more well-rounded offering.

Firstly, on the expense profile front, HJEN offers an edge with an expense ratio that is 5bps lower. One also gets the added benefit of pocketing a useful dividend yield of 1.16%, something which HYDR doesn't offer at all.

Then, as both portfolios track a relatively small number of stocks, you're bound to find some concentration effects, but yet still, that effect is relatively lower in the case of HJEN. The top-heavy nature is more obvious with HYDR with the top-10 stocks accounting for almost three-fourths of the total portfolio; with HJEN, their weight is less pronounced at 63% .

Also note that HJEN spreads its wings fairly evenly across stocks involved in different avenues. For instance, HJEN is not overzealously wedged to producer manufacturing or electronic technology which jointly account for 88% of HYDR's total portfolio. Rather, the weights are well-spread out beyond those two sectors and also include energy minerals and process work.

From a risk angle as well, HJEN comes across as less volatile, offering a monthly standard deviation profile that is around 1500bps lower than HYDR.

We believe this is dictated by the pockets that these two ETFs dabble with. HYDR, it appears likes to chase more unproven, early-in-the-lifecycle names, as exemplified by a heightened exposure of 88% to small and micro-cap stocks. However, HJEN exposure to these pockets is only around 50%, with the rest comprising of large and mid-cap stocks.

Finally, also consider that currently, HJEN offers much superior value relative to HYDR. The former's holdings are currently priced at a weighted average P/E of only 12x , a 52% discount to the corresponding multiple of HYDR.

Closing Thoughts- Technical Commentary

Going purely by the charts, at this juncture, HJEN does not appear to be the most opportune bet. The image below highlights how HJEN's relative strength over HYDR has been growing over time in the shape of an ascending channel. Currently, that ratio looks rather elevated, trading closer to the upper boundary of the channel, and substantially higher than the mid-point of the range. We don't necessarily think the ratio will collapse to the mid-point any time soon considering the long-term trend, but the prospect of some mean-reversion should not be ruled out.

Besides if we switch our attention to HJEN's own standalone chart, we can see that after a decent performance this month, the ETF is not too far away from hitting the downward-sloping resistance. We won't rule out a breakout from this resistance but do consider that there have been four separate instances where it has failed to clear it. The preferable terrain to have staged a long position was around the $12-$12.5 levels where the risk-reward looked more attractive.

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