Best Hydrogen ETF ASX: 2021 HGEN ETF Review

ETF Securities have teamed up with index provider, Solactive to launch Australia’s first Hydrogen Themed ETF, HGEN. In this write-up, I’ll start by giving you a flavour of the Hydrogen market, and then move into my HGEN ETF review. 

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Contents

You can click the links below to navigate through his post. 

If you’re interested in learning more about other ASX listed ETFs that’ll provide you with broader exposure to some of the worlds best-listed companies, check out my other reviews of the Best Australian ETFs in 2021.

Hydrogen Market Overview 

As an energy source, Hydrogen is not new. We’ve used it for decades for a number of purposes including petroleum refining and fertilizer production. We’ve even employed it on Airships as lifting gas in the early 20th century. Unfortunately, that experiment didn’t end to well..

Fast-forwarding to today, about 70 million tonnes of Hydrogen is produced globally every year!

Figure #1 – Hydrogen Powered U.S Airship Flying over NYC

Although Hydrogen is the most abundant element in the universe, it’s not found in isolation. That means it needs to be split from other elements using a number of different methods that require a lot of energy!

How Hydrogen Is Produced, and Why It Matters!

Most of the Hydrogen produced today is created through a process called steam methane reforming (SMR), which relies on natural gas.

Another common method of producing Hydrogen is through coal gasification, which transforms coal into hydrogen.

The problem with these two methods is they produce greenhouse gases as a by-product unless carbon capture techniques are implemented to partially store those emissions. 

HGEN ETF Review: Production Pathways For Hydrogen
Figure #1 – Production Pathways For Hydrogen (Source: Australia’s National Hydrogen Strategy)

All The Colors of The Hydrogen Rainbow

How Hydrogen is produced determines how it’s classified. Grey and Blue hydrogen are both produced through SMR or Gasification, the key difference between the two is that Blue Hydrogen employs carbon capture techniques to store the greenhouse gases produced as part of the process, and Grey Hydrogen releases those emissions into the atmosphere. 

What’s got the world excited about Hydrogen is the potential use of “Green hydrogen” as an energy source.

Importantly, Green Hydrogen produces zero carbon emissions as a by-product of the process. Green Hydrogen is produced using clean energy (wind, solar etc) to split water (H2) into hydrogen and oxygen through a process called electrolysis.

HGEN ETF Review: Hydrogen Production By Colour
Figure #2: Hydrogen Production By Colour – Source: World Economic Forum

The Cost of Producing Green Hydrogen Is Dropping. Fast. 

A number of factors like the cost of renewable energy technologies, and the storage of hydrogen have inhibited the production of clean, or green hydrogen over the years.

The good news is the cost of generating wind-powered electricity has fallen by about 70%, and solar PV electricity generation has fallen 80% over the past 10 years.

Furthermore, costs of storing, and creating hydrogen fuel cells are also set to fall, making the production of green hydrogen much more viable.

The Hydrogen Opportunity

Hydrogen has been touted as the ‘swiss army knife’ of decarbonisation because of its long list of potential clean energy use cases.

Hydrogen can be used as natural gas for culinary purposes and heating spaces. It can also fuel transport vehicles and vessels through fuel cell technology. 

If that wasn’t enough, hydrogen can also create electricity through fuel cells, or it could be burned to drive turbines. 

The Future of Hydrogen

Currently, only 0.3% of Hydrogen produced is green hydrogen. However, there are a number of green hydrogen projects being funded aiming to change that!

The ever-more improving economics involved with producing Hydrogen is compounded by the commitments powerful nations have made to using Hydrogen as a vehicle for realising their net-zero targets. 

To date, 30 countries have developed hydrogen roadmaps and 228 large hydrogen projects have been announced.  85% of those projects are located across Europe, Asia, and right here down under!

Mckinsey estimates that the total Hydrogen investment through 2030 will amount to USD 500 billion directly via hydrogen projects and government targets, and indirectly through the supply chain of suppliers and original equipment manufacturers. 

The enormous financial push towards hydrogen as a green energy source presents an exciting opportunity for investors to capitalise on the global effort towards a net-zero future. One way to do that is through ETFs like HGEN.

Investing In Hydrogen 

Thematic ETFs like HGEN is designed to invest in a range of companies that stand to take advantage of potential megatrends in technology, society, the environment and demographics over time. 

Thanks to ETF Securities, capitalising on the Hydrogen megatrend has become a lot easier for retail investors. 

ETF Securities HGEN ETF Review (ASX:HGEN)

ETF Securities HGEN ETF aims to provide investors with access to the world’s foremost Hydrogen focussed companies. 

To do so,  HGEN aims to mimic the returns of the Solactive Global Hydrogen ESG Index

HGENs underlying benchmark tracks 30 companies from developed markets across the globe and places a strong emphasis on companies classified as Hydrogen ‘Pure Plays’ (more on those later).

Why Invest In HGEN?

The Green Hydrogen space is fresh on the scene and growing fast as the world accelerates away from the use of fossil fuels. To capitalise on the Hydrogen opportunity, new start-ups are sprouting up all the time.

With so much of this story yet to play out, it’s difficult to predict who the winners will be once the market consolidates. 

Holding an ETF like HGEN provides investors with exposure to the world’s leading Hydrogen related companies, without doing the guesswork of forecasting which companies will thrive over the long term. 

How Is HGEN Constructed? 

The initial universe of companies selected for inclusion in HGEN is determined by Solactive (benchmark provider) based on a number of criteria like geographical location, size and liquidity. 

For example, HGEN only invests in companies with market caps over $US 100m headquartered in developed markets.

For those ESG focussed investors out there, I’m happy to report that HGEN also has some comprehensive ESG filters applied to it. HGEN does not include companies that generate any, or a capped percentage of revenue and/or operations in the following activities ⬇️

  • Controversial Weapons
  • Small Arms
  • Gambling
  • Thermal Coal
  • Recreational Cannabis & Tobacco
  • Conventional Oil & Gas
  • Unconventional Oil & Gas

Once eligible companies are identified, HGEN uses Solactives natural language processing technology “Artis” to identify pure-play hydrogen companies. 

Pure-plays are defined by Solactive as companies classified under the following sub-industries.

  1. Fuel Cell Providers (equipment & techonlogy) and:
  2. Thermal and Chemical Processing Machinery Makers.

Using keywords, Artis scours the internet for companies “expected to have significant exposure in the field of hydrogen” and sorts them into pure plays, and non-pure plays based on their alignment with the indexes strategy. 

You can read more about how HGEN is constructed in its index guideline.

HGEN priorities the inclusion of  ‘Pure Plays’

HGEN caps the weighting companies can have in the ETF depending on their classification.  Pure-plays are capped at 10%, and non-pure plays are capped at 4%. 

Capping constituents undoubtedly assists with diversification. However, I’m inclined to think this approach is similar to selling winners and buying losers!

Pure-plays that earn a 10% weighting have demonstrated the growth in valuation (market cap) required to demand a larger weighting in the index. Part of me is frustrated that HGEN stunts investors’ exposure to those companies, especially given the industry is growing rapidly!

As Vice-Chairman of Berkshire, Charlie Munger said “diversification preserves wealth, but concentration builds wealth”.

HGEN ETF Review: Sector & Country Break Down

HGEN ETF Review: Sector & Country Break Down
Figure #3 HGEN Sector & Country Allocation – Source: HGEN Fact Sheet October 21’

HGEN ETF Review: Performance

HGEN has been listed since October, and its underlying index was only established in 2020. This obviously makes it difficult to analyse performance over a reasonable amount of time. That said, it’s returned a handy 22% (Nov 21’) since listing on October 21’.

To give some insight into the potential underlying performance of HGEN, I’ve taken HGENs top 5 holdings and assessed their past performance over a 5 year period. In addition, I’ve compared that with S&P/ASX 300 5 Year Total Return.

 For context, HGENs top 5 holdings occupy 46% of the ETFs total weighting (Nov 21’).

As of November 20215 Return (Excl Dividends)
Plug Power Inc2,993.75%
Bloom Energy Corp32.52% (Listed Since 2018)*
Ballard Power Systems Inc734.36%
ITM Power plc1,888.88%
Ceres Power Holdings plc1,136.27%
Average 5 Year Return PA*1,357.16%
S&P/ASX 300 5 Year Return PA*35.68%
Table #1: HGEN Top 5 Holdings Performance – Source: Author’s Calculations

*Assumes an equal weighting

I almost fell off my chair reading that number too. Before you crack open your brokerage app, remember that there is a lot that needs to play out in this space to expect those kinds of returns going forward. 

That’s why the past performance of these companies is in no way indicative of the future performance of HGEN. Sorry to burst your bubble. 

HGEN ETF Review: Price

Thematic ETFs like HGEN focussed on providing exposure to hyper-growth industries aren’t usually cheap, and HGEN is no exception.

HGENs MER of 0.69%* makes it almost 7 times more expensive than Vanguards Broad Based S&P/ASX 300 tracking ETF,  ASX:VAS. 

10,000 Invested in HGEN would cost you.

ETF Securities would charge $69 for every $10,000 invested in HGEN. Comparatively,  $10,000 invested in VAS would cost $10 annually. 

*Fees excludes any bid/ask spread fees.

Is HGEN Worth Its Chunky Fee?

It’s difficult to determine if HGEN will prove to be worth its weight in gold for investors..whoops wrong element. 

What I can say is that HGEN aims to track companies set to ride the profound tailwind of the global push towards ‘Net Zero’.

According to the IEA clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion each year to reach net-zero by 2050.

Companies that can stand to be enormous beneficiaries of what seems to be a pivotal element to reaching the world’s net-zero goal.

With this in mind, it’s totally possible HGEN more than justifies its MER. Of course, there are risks worth seriously considering. Particularly valuation.

HGEN ETF Review: Risk

The clean hydrogen industry is showing potential, however, it’s still very early in the night. 

Because of the excitement around the space, the majority of companies within HGEN are pre-profit, which means traditional valuation metrics like the price to earnings (P/E) ratio can’t be applied. 

Instead, the price to sales (P/S) ratio can be used. P/S is commonly used by early-stage growth investors to compare the valuation of investments that are pre-profit. 

HGENs top 10 holdings, which equates to 70.1% the ETFs total weighting have an average P/S of 140. 

A P/S translated to investors paying $140 for every $1 HGENs top 10 highest weighted companies earn in sales!

As of November 2021Price to Sales Ratio
HGEN Top 10 Holdings P/S Ratio140
VAS (ASX 300) Top 10  P/S P/S Ratio6
Table #2: HGEN P/S Ratio (Top 10 Holdings) – Source: Author’s Calculations

Author’s calculations, data source: Yahoo Finance. 

For context, you’d be paying $6 for every $1 of sales earned by the top 10 companies within the S&P/ASX 300 Index.  

Quite the contrast right?

Although owning a HGEN means you’re more diversified than you would be if you owned two or three Hydrogen companies,  it still does come with a decent amount of concentration risk because it’s exposure is limited to one industry. 

Throw HGENs valuation into the mix, and you’ve got considerable risks worth deliberating.

Additionally, ETF Securities HGENs Benchmark Statement provides a more detailed list of the risks worth pondering over before investing. 

HGEN Key Facts

Use the table below to grab all the key facts about HGEN you need to get comfortable with it!

As of November 2021
ETF IssuerETF Securities
Management Fee (Incl operational costs)0.69%
Benchmark IndexSolactive Global Hydrogen ESG Index
Dividend Reinvestment PlanAvailable
Income Distribution FrequencyAnnually 
Return Since Inception (Oct 2021)23.8%
Funds Under Management (FUM)$56.7M
Number of Holdings (ETF)30
Weighting MethodologyMarket Cap Weighted 
Weighting Caps(10% Cap for Pure Play and 4% for Non-Pure Play)
Listed Since6 October 2021
Top 10 Holdings (highest to lowest concentration)Plug Power Inc, Bloom Energy Corp, Ballard Power Systems Inc, ITM Power PLC, Ceres Power Holdings PLC, Doosan Fuel Cell Co Ltd, FuelCell Energy Inc, Linde PLC, Air Products and Chemicals Inc, Mitsubishi Chemical Holdings Corp.
Top 10 Holding Concentration70.1% of the total ETF holdings
Table #3: HGEN Key Facts – Source: HGEN Oct 21′ Fact Sheet

*After fees, dividends re-invested. 

Want to know more about HGEN?

You can check out the latest HGENs fact sheet If you’re keen on doing some general reading. 

HGEN ETF Review: Jesse’s Verdict

To sum up, writing this article has opened my eyes to the swiss army knife of decarbonisation, and its very bright future. 

The main drawback with HGEN is the lofty valuations of its underlying holdings. Although that wrinkle may get ironed out over the long term, assuming green hydrogen grows into its potential of decarbonising the world!

As a long term investment, I think it’s worth considering thematic ETFs like HGEN as a small position in a well-diversified portfolio. Especially if you’re not the type to bury your head into individual company research! 

Just remember to keep an eye on its valuation and ensure to align that with your investing time horizon!

Want More ETF Reviews?

If you enjoyed my HGEN ETF review and are interested in learning more about other ASX listed ETFs, check out my other reviews of the Best Australian ETFs.

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About The Writer

Hi, I’m Jesse, but you can call me Jes for short. My passion is simple, I’m on a mission to make the world of investing easily understood by removing the ‘too hard basket’ stigma that surrounds it.

P.S. I’d love to meet you on Twitter or Insta or both.

Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only.  The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as financial advice.

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