The "Swiss Army knife" of decarbonisation

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Investors jumping onto the decarbonisation train, now have a new way to play this theme. One of the beautiful things about this particular theme is that there are so many ways to tackle it and still create a "pure-play" portfolio. This is exactly what ETF Securities has mastered in its hydrogen ETF. 

The newly launched ETF (ASX:HGEN) has found a unique way to package up the growth runway of hydrogen for its investors by taking a "swiss army knife" approach to hydrogen. We spoke with Kanish Chugh, head of distribution, about the runway for the hydrogen theme. 

This versatile theme is played out through fuel for cars and aircraft. Hydrogen is a necessary part of the food chain - assisting in ammonia production for agribusiness. It also is a key formula for steel making, so think shipping and supply chains. The list goes on. 

What has changed is that hydrogen demand is growing as its production become more innovative and cost-effective, so the uptake potential for hydrogen is huge. Bank of America has reported the hydrogen technology market could grow to US$4 trillion in direct revenue by 2050. 

In this video, Kanish Chugh, head of distribution at ETF Securities Australia provides a deep dive into what's powering its new hydrogen ETF and the stunning opportunities in the hydrogen market. 

 

This transcript has been lightly edited for clarity. 

What is the Hydrogen theme and what makes it interesting?

When we think about hydrogen, it's not an old energy source. It's been around for many decades. But for a long time, and still now today, about 95% of it comes from fossil fuels like methane and coal. So it hasn't been seen as a clean energy source. 

And with the current way in which we're all thinking about net zero emissions, how do we be cleaner in our energy usage or energy resources and battery technologies?

Hydrogen is starting to get more focus and it's sometimes called the Swiss Army knife of de-carbonisation because it's very versatile. Because essentially it can remove carbon dioxide from a lot of highly polluting industries. So think about steel making or ammonia production, which is very important in agriculture or even shipping. You potentially have the ability to have a clean energy source that leaves a close to zero footprint on the environment.

And I think that's what really people are focusing on at the moment. And that's what hydrogen can definitely provide. And I think that the key part around that is the whole idea of green hydrogen. 

So in terms of what is green hydrogen? It's created by using clean energy to split water into hydrogen and oxygen. So it promises to really be quite an energy revolution. There are some really important stats, but it can replace hydrogen generated from fossil fuels and that's where the future is. So the reason why hydrogen is important now, the reason why there's a lot of focus on it is because of that green hydrogen and where it could eventually lead us.

What’s driving the push for green hydrogen?

I think it's a combination. So there's social change from the perspective of how we want to live our life: there's urbanisation, there's population growth. So we are seeing the need to find alternative energy sources outside of oil fossil fuels. 

Technology is a big one. We've seen that in battery technology and we've seen it in a lot of other areas, when you have advancements in technology, it opens up innovation in certain industries. 

So if hydrogen's been a source of energy for many decades, why is it so relevant now? It's because there have been advancements around how we can obtain hydrogen using essentially what's called electrolysers. 

So it's electricity that zaps water to split out hydrogen and oxygen, and you capture that hydrogen. And essentially that is what is green hydrogen. So that technology aspect. Another big part is cost. So as you get advancements in technology, costs start to come down.

Where are the investment opportunities in hydrogen?

The opportunities for the hydrogen economy, the megatrend is quite vast. So if we get to this point in terms of making a clean energy solution, it can be used in aeroplanes, in ships. It can be used to make things such as ammonia, from an agricultural perspective. So it could help the world feed itself, for example.

If you think about ammonia and fertilisers, which helps crop grow, well, hydrogen is used in that process. If you can make a cleaner way to make that fertiliser, well then that's going to help us. Even in traditional construction. So making materials such as steel and iron. So that's really important.

In terms of the potential growth of the opportunity. So currently, it's about US$142 billion in revenue in 2019. Bank of America is suggesting that the hydrogen economy could be worth anywhere of up to US$4 trillion in revenue by 2050. In terms of the energy market, it's currently making about 5% today. 

And again, Bloomberg NEF suggests that hydrogen could take up around 25% by 2050. So still a lot of growth to be had and it's still in very early stages. From an investor standpoint, there's still a lot of potential here. A lot of new companies still coming to the market, especially within that green space.

How will you implement the strategy?

So ETF Securities, we've launched the ETFS Hydrogen ETF and the code for that is ASX:HGEN. It tracks the Solactive Global Hydrogen ESG index. At a high level that index and this ETF invest in 30 stocks from developed markets, plus Korea and Taiwan, that have a heavy exposure to hydrogen. 

It's important when we think about thematic ETFs, and it's a question we tell investors to ask themselves is, is this thematic ETF a pure play? Because when you're investing in a thematic ETF you want it to be as closely aligned to the theme that you want to exposure to.

So we took that question when we're developing the product and when we're talking to index managers to say, "Does this index closely aligned to the theme that we're wanting to achieve?" And so within this index, it targets pure-play companies. So pure players that produce from the hydrogen value chain. 

In the way in which you think about it, anywhere from the fuel cells, which is essentially like the engine that turns hydrogen into electricity, the components that make those fuel cells, the hydrogen refuelling stations and other infrastructure like storage, and even the companies that generate or build those electrolysers.

So that machinery, the equipment that produces that green hydrogen. So it's really an all-encompassing approach to looking at the hydrogen economy.

Why is HGEN so concentrated?

The approach to have a concentrated portfolio is because we want to provide investors with an ability to target a specific theme.

There are broader exposures. You can get potentially some of this exposure through broader markets or broader sectors. But within this space, in terms of when you're thinking about megatrends, it has to be country agnostic, it has to be sector agnostic.

And we're giving an investor the ability to say, "Well, if I want to take exposure, I want to be overweight the hydrogen theme, how do I do that?"

And there are some Australian names, not in the portfolio at the moment, but there are Australian names that are starting to get involved in hydrogen. It's important to, I guess, given investors the option to look further afield because it's more, especially within this mega-trend, there are probably companies outside of Australia, in the US Korea, Taiwan, et cetera, Europe that are doing more in this space than we are.

What are some of the underlying holdings of this ETF?

So, as I mentioned, the ETF is tracking an index from Solactive. But it comes down to a really crucial point, which is in that product development process, when we were trying to identify the index that truly represented the hydrogen megatrend, how do you do that? So there are no sector classifications. There is no industry classification because when you're looking at megatrends, often they're sector agnostic and they're region agnostic.

So what Solactive did was, Solactive have what's called ARTIS. And ARTIS is their proprietary, it's a natural language processing algorithm. Essentially, it's an AI keyword tool that they've created. And they use ARTIS to identify companies that are expected to have significant exposure in the field of hydrogen. So that is the most important part. 

So we're looking at companies that are truly exposed to the hydrogen thematic. But what's more important actually is what are we not looking at? Because that was really relevant to us.

The universe excludes oil companies, it excludes motor vehicle companies, and because we really wanted to highlight and focus on green hydrogen (which we believe is the future of this particular megatrend) we have excluded oil, coal and gas companies as well.

So most of those companies involved in the grey and the brown hydrogen have been removed from the index. And a final key point, I guess, is again, in an area which is all talking about the green environment being clean. We've also applied, and the index is applied in ESG filter. So that uses data from Minerva Analytics to exclude companies that are involved in controversial weapons, small arms, tobacco, and fossil fuel. So no fossil fuel companies exist within the index. 

In terms of some stocks, it's 30 stocks from around the world. But one of the most famous is Plug Power (NASDAQ:PLUG). So Plug Power, it's famous for relating to the hydrogen economy and essentially it primarily makes fuel cells that turn the hydrogen into energy. So their fuel cells operate in very niche transport areas, things like forklifts, for example, and they've got big contracts with Walmart, Amazon, et cetera. And they're also looking to expand along this space in terms of green hydrogen and their technology across different transportation. So that's a really important one. 

Another one is Nel (FRA: D7G). So, Nel is a Norwegian company. Now it's a company that actually... It's one of the oldest companies that has produced green hydrogen. So it produces hydrogen from water and it has its fingers in many pies. So the hydrogen that it produces historically has gone to ammonia and that then it goes into fertiliser.

But it also runs one of the world's largest refuelling stations, which tops up the tanks of hydrogen buses and cars. And I think the last one and really important with Nel, is it works with Tesla's competitor Nikola to produce the electrolysers at its refuelling stations. So widening out hydrogen's infrastructure. Outside of some of those, obviously, we've got companies like Bloom Energy Group (NYSE:BE) and Doosan Fuel Cell (KS:336260) as well.

What are some of the risks investors should be aware of?

So I think with this one specifically, it's important to understand that it is a growth ETF. It's a growth-orientated ETF. It's looking at an investment, a thematic, an opportunity that has in the long-term a lot of investment opportunity. But in that period, there will be inherent volatility that the stocks and the ETF may have over and above a broad market. So that's important. So it is a long-term investment.

The other risk that people may have is potential overlap. Now we've done our research in terms of overlap of this ETF to our other thematic ETFs.

And it's very minimal if non-existent to our other exposure. So because of the megatrend and the theme that we're focusing on with hydrogen, there is minimal overlap. But for some of the other investors, you need to open up the portfolio, understand the index, understand what it's looking at and are your values aligned to this theme?

Is your portfolio also not having as much duplicate exposure? And if it's not, well, then there's potential there for you to have a truly diversified investment within your portfolio that is different, also, to the rest of your portfolio.

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