Investing in hydrogen ETFs

What are ASX hydrogen ETFs? 

They are exchange-traded funds (ETFs) listed on the Australian Securities Exchange that invest in companies in the hydrogen sector. Hydrogen has the potential to provide zero or near-zero emissions energy. 

As the population looks to limit emissions to protect the environment, demand for fuel sources such as hydrogen is increasing. 

A brief introduction to hydrogen

Hydrogen is a flammable gas used in fuel cells to generate power and heat. A clean fuel, it produces only water, electricity, and heat. Hydrogen has the potential for use in various applications across sectors including transportation, commercial, industrial, and residential.

Hydrogen gas is currently costly to produce compared to fossil fuels. Energy experts aim to improve the efficiency of production technologies to make them cost-competitive with fossil fuels. As costs fall, hydrogen will become more competitive with fossil fuels, enhancing uptake. 

A brief introduction to ETFs 

ETFs are pooled investment vehicles where a fund manager raises money from many investors and then uses that cash to invest in a portfolio of assets. These might include shares, bonds, commodities, or even cryptocurrencies. 

Most Australian ETFs are passive investments that seek to track the value of an index. An active ETF, by contrast, is more akin to an actively managed fund with a manager or team making active investment decisions.

There are many different types of ETFs you can invest in, including those that focus on a specific industry or commodity, plus those that give broad exposure to share markets both in Australia and offshore. You can invest in ETFs that fit your values, investment objectives, and financial situation. There are more than 200 ETFs listed on the ASX (and counting), with this type of investing becoming more popular in the past 20 years.

How to invest in ETFs in Australia 

You can buy and sell units in an ETF on a stock exchange the same way you purchase shares through a stockbroker or via an online share trading platform. Because ETFs hold a basket of securities, they provide investors with instant diversification. 

You pay a broker commission (or online trading fee) when buying into an ETF, just as you would buying ASX stocks. However, the commission on a single purchase of ETF units is much cheaper than what you would have to pay to buy each individual asset held within the ETF.

What about international funds? 

Many ETFs listed on the ASX expose investors to international markets, such as the United States and Europe. This includes ETFs that provide broad market exposure by following an index such as the S&P 500, and sector or theme-specific ETFs, which may include companies from various jurisdictions. 

Australian investors may also be interested in ETFs listed on offshore exchanges. To access these offshore ETFs, Australians need to set up an account with a broker that provides access to these securities. 

Why invest in hydrogen ETFs? 

Hydrogen energy is a promising alternative fuel with the potential to help decarbonise industry, store renewable energy, and replace natural gas. In the long term, the industry expects hydrogen to play an important role in fuelling commercial vehicles and replacing diesel. 

It is also expected to contribute to decarbonising energy-intensive sectors such as steel, chemical manufacturing, and shipping. Investing in renewable hydrogen shares provides investors with the potential to profit from the shift to clean energy sources.

Investing via thematic ETFs means investors will benefit from diversified exposure to the hydrogen sector, with their money spread across several different hydrogen companies. Some may perform well, while others may falter. But spreading the investment across a number of them lowers the risk. The investor can avoid putting all their eggs in one basket. 

Top hydrogen ETFs on the ASX

There is currently just one ETF specific to hydrogen on the ASX. That's the Global X Hydrogen ETF AUD (ASX: HGEN). This ETF seeks to invest in companies globally that stand to benefit from the advancement of the global hydrogen industry.

This includes companies involved in hydrogen production, the integration of hydrogen into energy systems, the development and manufacturing of hydrogen fuel cells, and other technologies related to the use of hydrogen as an energy source.

The Global X Hydrogen ETF invests in companies worldwide, including the United States, Britain, South Korea, Norway, Canada, and Japan. These companies operate in the industrials, materials, and information technology sectors. The fund seeks to provide investment results that generally correspond to the price and yield performance, before fees and expenses, of the Solactive Global Hydrogen ESG Index.

For investors willing to move beyond the ASX, hydrogen ETFs are listed on offshore stock exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ. 

The Direxion Hydrogen ETF (NYSEARCA: HJEN) offers exposure to 30 companies across hydrogen-related sub-themes, including production and generation, storage and supply, and fuel cell and battery. 

The Global X Hydrogen ETF (NASDAQ: HYDR) has 26 company holdings. Although the fund has taken a pummelling since its inception two years ago, it could be a good place to park clean energy money going forward. 

Pros of investing in hydrogen ETFs

High growth potential: Global demand for cleaner fuel and the decarbonisation of energy-intensive sectors is gaining momentum and will likely drive the hydrogen market exponentially. The global green hydrogen market size was worth US$1 billion in 2021. It is projected to reach US$72 billion by 2030, growing at a compound annual growth rate (CAGR) of 55%.¹ 

Sector tailwinds: Hydrogen is expected to be a vital component of the global green economy. The election of the Labor Government has provided a renewed focus on clean energy sources. But the shift to clean energy isn't confined to a single sector or region. Globally, government incentives are providing tailwinds to hydrogen companies. 

And the cons?

Early stages: Many hydrogen companies are still in their early stages of development. Much growth and development are required before we reach a position where hydrogen provides a widespread energy source.

Volatility: Because we are in the early stages of using hydrogen as an energy source, many hydrogen companies still need to grow and become well-established. This means their share prices can be volatile. 

Are ASX hydrogen ETFs a good investment? 

Whether an ASX hydrogen ETF is a good investment for you will depend on your financial situation and investment goals. Hydrogen may have a big future thanks to the demand for clean energy, but the industry is still in its infancy right now. 

This means investors in the sector should have a long-term time horizon of five years or more. Investing in hydrogen via an ETF rather than directly in hydrogen-industry companies means investors benefit from instant diversification. They also benefit from exposure to companies that may be difficult to gain exposure to directly (and cost-efficiently), such as companies listed on international stock exchanges. 

Hydrogen companies comprise only a small component of stock markets globally, so investors should be sure to diversify their portfolios outside the sector as well.