HYDR - HYDR ETF: Only For Investors Who Believe The Hydrogen Hype

Summary

• The Global X Hydrogen ETF was started in 2021 to invest based on the Solactive Global Hydrogen Index. Solactive is a German-based Index provider.
• As part of fighting climate change and going "green" in energy, there are those that believe hydrogen must play a major part in making the transition from fossil fuels possible.
• This article reviews the ETF and explores hydrogen's place in the future. So far, this ETF has not treated investors well. I'd classify it as a High-Risk; Possible High-Reward investment.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

There are a few things I remember about hydrogen from 9th grade chemistry. First, it is a gas and the first element in the Periodic table. Second, it takes two hydrogen molecules + one oxygen molecule to make water. From history class, during WWII, some German vehicles ran on hydrogen because petrol was needed for the war machine.

While wind and solar power are considered "green" choices to replace fossil fuels in cars, hydrogen in cars is being explored, especially if lithium supplies limit the world from building enough electric-powered vehicles.

I will go into more about how hydrogen can help control climate change in the Portfolio strategy section of this article. The purpose of the Global X Hydrogen ETF ( HYDR ) is to give investors a more focused means of getting on that "green" train.

Global X Hydrogen ETF review

Seeking Alpha describes this ETF as:

HYDR seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Hydrogen Index . The fund invests at least 80% of its total assets, plus borrowings for investments purposes (if any), in the securities of the index and in American Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs") based on the securities in the index. The underlying index is designed to provide exposure to companies that are positioned to benefit from further advances in the field of hydrogen technology. The fund is non-diversified. HYDR started in July, 2021.

HYDR has $41min AUM and cones with 50bps in fees. With its short history and one dividend payment, no expected yield is provided.

Index review

The following points are condensed from the Index Guide PDF .

Eligibility rules:

• Primary listing in one of the countries that are part of the Developed Markets and Emerging Markets (excluding India). China "A" shares might be eligible.
• Market-Cap of at least $100m USD for companies that are not in the Index; $80m USD for companies that are in the index.
• Trading volume of at least $2m USD for companies that are not in the Index; $1.4m USD for companies that are in the index.
• Free Float percentage of total shares outstanding of at least 10% or a minimum Free Float Market-Cap of $1b USD.

Selection process:

• Possible stocks are identified using ARTIS®, SOLACTIVE’S proprietary natural language processing algorithm.
• Using keywords that describe the index theme, ARTIS® identifies companies that have or are expected to have significant exposure to the provision of products and/or services that contribute to the hydrogen industry.
• The algorithm then ranks the companies according to the frequency with which the company is referenced in relation to the specific keywords (“Index Score”). Each company is then classified as follows according to the extent to which it generates revenues from Hydrogen Activities (Pure, Pre-revenue, or Derived).
• All Pure-Play companies are included as Index Components, up to a limit of 40 components. If there are fewer than 25 Index Components after all Pure-Plays have been included, Pre-Revenue companies are included until the index reaches 25 Index Components. If there are fewer than 25 Index Components after all Pre-Revenue companies have been included, Diversified companies are included until the index reaches 25 components. If fewer than 25 companies are identified that satisfy the above criteria, all eligible companies are selected and the INDEX consists of less than 25 INDEX COMPONENTS.
• There are buffer rules applied to minimize index turnover.

Weighting rules:

• Each stock is assigned a weight according to Free Float Market-Cap, subject to the following limits:
  • The maximum weight of an INDEX COMPONENT is 12%.
  • The minimum weight if an Index Component is 0.3%.
  • The aggregate weight of the INDEX COMPONENTS weighted above 4.5% is capped at 45%. The remaining companies are capped at 4.5%.
  • The aggregate weight of Pre-Revenue and Diversified companies cannot exceed 10% of the index weight, and the maximum weight of a Pre-Revenue or Diversified company is 2%.
  • If the Index manager determines that the aggregate Index weight of the Diversified and Pre-Revenue components is greater than 20% on any Review Day, the aggregate Index weight of the Diversified and Pre-Revenue components is capped at 18%.

HYDR holdings review

The country allocation is very international, exposing the ETF to currency risk.

The sector allocations show almost total dependence on the industrial side of the business, not end users.

Complete holdings list

With the Top three stocks comprising almost 36% of the portfolio, I included descriptions for each and a returns chart.

Nel ASA ( NLLSY ):

With more than 3,500 reliable, cost-efficient electrolyzes installed around the globe, Nel Hydrogen is the recognized industry leader of Alkaline and Proton Exchange Membrane (PEM) water electrolysis.

Since our founding in 1927, sustained R&D efforts have contributed to continual improvement of electrolyze technology, setting the benchmark in the market. Our electrolysis technology is today widely respected for its robustness, reliability and energy efficiency. Our water electrolyzers make a superior choice for Industry, Transport and Power-to-X applications.

Source: nelhydrogen.com

Bloom Energy ( NE ):

Powering our planet with resilient, sustainable, and predictable energy is the defining challenge of our time. Bloom empowers businesses and communities to take charge of their future with abundant, clean energy without compromises. Bloom Energy Corporation designs, manufactures, sells, and installs solid-oxide fuel cell systems for on-site power generation in the United States and internationally. The company offers Bloom Energy Server, a solid oxide technology that converts fuel, such as natural gas, biogas, hydrogen, or a blend of these fuels, into electricity through an electrochemical process without combustion.

Sources: bloomenergy.com/ SeekingAlpha.com

Plug Power ( PLUG ):

We deliver a significant value proposition to our customers, including meaningful environmental benefits, efficiency gains, fast fueling, and lower operational costs.

Our vertically-integrated GenKey solution ties together all critical elements to power, fuel, and provide service to customers such as Amazon, BMW, The Southern Company, Carrefour, and Walmart.

We have leveraged our know-how, modular product architecture, and foundational customers to rapidly expand into other key markets, including zero-emission on-road vehicles, robotics, and data centers.

Source: plugpower.com

Bloom Energy has held up okay, but the other two positions show their importance as to where HYDR might go in terms of returns to investors. This chart also tells me the other 22 holdings were down more than HYDR was.

HYDR distributions review

HYDR paid $.0118 in December'21; no payments were made in 2022. The policy is to pay semi-annually.

HYDR performance and risk review

To see how HYDR did against competitors for clean energy investors, I used the Seeking Alpha Peers function and found six others.

Only the Invesco WilderHill Clean Energy ETF ( PBW ) is close to the HYDR ETF's poor performance since it started. The other hydrogen-focused ETF, the Direxion Hydrogen ETF ( HJEN ) has done much better. A quick glance showed HYDR and HJEN only share about 50% of the same stocks. Using slightly truncated data, HYDR shows the highest StdDev and second worse Sharpe and Sortino ratios.

Portfolio strategy

The Global X Hydrogen ETF is one of two ETFs I am aware of whose sole focus is investing in companies that will drive and profit from an expanding use of hydrogen in our lives as a replacement for fossil fuels that the experts say is the leading cause of climate change. Some belief in that claim seems necessary, at least to me, to consider a fund like HYDR. Here are places I found that those "in the know" say hydrogen can help in reducing the effects of CO2, a leading cause of climate change.

• Huge potential to replace natural gas as a way of heating domestic and commercial buildings via existing natural gas infrastructure.
• Hydrogen can also be used in gas turbines and coal-fired power stations to reduce their emissions.
• It can also be used in “fuel cells,” where hydrogen and oxygen mix in a reaction that creates electricity. Currently, hydrogen fuel-cell power generators are in use at 113 sites across the United States.
• In industries with high CO2 emissions which currently consume lots of coal and where electrification is difficult, such as iron, steel and cement.
• Sustainable Aviation Fuel, made by combining it with carbon from captured CO2 emissions, can be dropped into existing planes with little or no redesign because it is chemically identical to existing aviation fuel.
• Hydrogen could also solve the problem of variable output from wind and solar, allowing producers to store excess renewable electricity in hydrogen when supply exceeds demand.

Along with not emitting any greenhouse gas when used, it can be moved and stored in either gaseous or liquid form. Hydrogen, besides being the lightest, is also the most abundant gas in the universe. That said, there are some negatives, as there are with most climate change fighting solutions; some of which are:

• Almost all the hydrogen currently produced is derived from fossil fuels, resulting in hydrogen possibly having a greater climate impact than natural gas or oil.
• Not all hydrogen is considered green; it depends on how it is generated. The above source would be considered blue or gray. Green hydrogen comes from splitting the water molecule, but only if the power used in the process is green itself.
• The cost of hydrogen, compared with that of other energy sources, ranges considerably. In some places, twice the cost of diesel.
• Hydrogen-powered cars are hampered by high prices and the lack of hydrogen filling stations.

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