Hydrogen ETFs May Be Poised for an Upswing

Subsidies planned for 2024 and emergence of hydrogen-blended fuels could lift these ETFs.

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Reviewed by: Lisa Barr
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Edited by: Daria Solovieva

Hydrogen exchange-traded funds hit bottom with a drop of 60%-80% from their November 2021 highs, but there's good news on the horizon.

Massive subsidies planned for 2024 affirm a viable earnings path for the industry, and the promise of green hydrogen is gaining traction in Europe and potentially offering a cheaper transition to a "zero-ish" emissions future compared to electric vehicles.

Additionally, the technology is finding new applications, including green hydrogen and CO2 blended fuel, which is technically carbon-neutral and can go into existing car engines. 

Investing in hydrogen with ETFs can become appealing, as the cost of e-fuel continues to drop and the technology is finding new applications, including powering trains and construction equipment. 

Peak Pessimism 

The peak pessimism of hydrogen ETFs seems to have hit a low. Europe, particularly Germany, is pushing for hydrogen use, and U.S. government subsidies are making hydrogen more viable as an industry. The eFuels produced in Chile and Texas also present a promising opportunity for carbon-neutral fuel that can be used in existing car engines. 

In December, an HIF Global facility in southern Chile began the production of eFuels, a green hydrogen and CO2 blended fuel that is technically carbon-neutral and can go straight into existing car engines. The company, working with Porsche, Exxon and Siemens, got a permit for a Texas facility just last week.

A new estimation for this type of e-fuel is occurring in Europe. Germany is pushing back on a new EU law on CO2 emissions, demanding that Brussels provide a path for e-fuels that can be used in existing internal combustion engines after 2035.

Hydrogen may be a more inexpensive way to transition to zero emissions than electric vehicles. The development of a hydrogen-powered jet engine by Rolls Royce, the use of hydrogen-powered backhoes by JCB, and the operation of diesel-less trains by Alstom in Lower Saxony prove that hydrogen power is gaining traction. 

The U.S. buildout is quickening as well: The Inflation Reduction Act’s $13 billion in tax credits drop green hydrogen’s price from $4 per kilogram to $1 per kg.

In addition, the Department of Energy, via the IIJA’s $9.5 billion, is subsidizing hydrogen hubs nationwide, with seven to 10 locations to be chosen this fall. The primary market will be utilities, heavy transport and industry.

And the EU approved €5.2 billion in subsidies for green hydrogen projects in September. There are now 300 green hydrogen projects under construction worldwide.

Investing in Hydrogen With ETFs  

There are three pure-play hydrogen ETFs available in the U.S.: the Global X Hydrogen ETF (HYDR), the Defiance Next Gen H2 ETF (HDRO) and the Direxion Hydrogen ETF (HJEN).

HYDR is 27.91% U.S. and 65% U.K. HDRO is 31.5% U.S. and leans more to South Korea (18.73%), while HJEN has an 11.38% Japanese weighting and about 5% in Thai and Taiwanese firms. Each ETF tracks a different index. 

 

Hydrogen ETF Ratios

 

HJEN has a sizable 11.38% Japanese weighting and about 5% in Thai and Taiwanese firms. It uses the Indxx Hydrogen Economy Index, which allows purchases of not just pure plays but so-called quasi-plays and marginal plays (where less than 50% revenues, and less than 20%, respectively, come from hydrogen).

These marginal plays allowed HJEN to pick up BP and Shell, as well as its top component Air Liquide, a French industrial gas behemoth that has had recent stellar run. This explains how the ETF has outpaced its competitors by 18% in a year-over-year comparison. 

“Green” hydrogen is created using renewable energy—wind, solar and hydroelectric—to power electrolyzers that separate water into hydrogen and oxygen.

The “pure play” firms held by these three ETFs typically create these electrolyzers as well as the fuel cells, e-fuels, H2 distributions systems, or the vehicles that use the technology.

The global fuel cell market is steadily moving from natural gas to hydrogen and biomass sources. It is dominated by a few established players such as Bloom Energy (U.S.), Doosan Fuel Cell Co., Ltd. (South Korea), Kyocera Corp. (Japan), SFC Energy (Germany), Ballard (Canada) and Plug Power Inc. (U.S.).  

It grew from $3.97 billion in 2022 to $5.16 billion in 2023 and is expected to grow to $13.61 billion by 2027, according to a fuel cell global market report published in February 2023. 

For most Americans, the face of the hydrogen market has been Bloom Energy and Plug Power. Together they make up 20% of HYDR, 13% of HDRO and 11% of HJEN. In many ways, these two enterprises will dictate the long-term viability of the ETF investment space in the U.S.

 

Hydrogen ETF Holdings

At present, both companies are money losers. Each saw recent analyst downgrades in March and the kind of capitulation in sentiment in April that marks the end stage of every frenzy.

The companies have distinct differences, though. An older company, San Jose-based Bloom Energy, dominates the stationary fuel cell market in the U.S., with 80% market share, helping businesses diversify from unreliable local electrical grids (example, that freak Texas ice storm).

Most of its legacy servers used natural gas, but new models (and older models via an upgrade) convert hydrogen, into electricity without combustion. The company has managed a 10-year trailing revenue CAGR of 28% and even had a technical revenue and earnings beat for 4Q 2022.

Bloom had a $135.7 million gross profit on $462.6 million in revenue in 4Q 2022, though money didn’t reach the bottom line.  

Full-year profitability should only come in late 2024 when analysts project FY earnings per share of .39 on $1.93 billion of revenue. Projections are always speculative, but with $348.5 million in cash and another $311 million soon expected via its SK ecoplant tranche, Bloom’s liquidity will be sufficient for the foreseeable future.

On the other hand, Albany-based Plug Power is the proverbial bad boy of the hydrogen scene. Like Tesla in 2017, it is a media darling that appears too ambitious in too many segments and often has analysts exasperated. Despite excellent revenue growth of 39%, its gross profit margin is -23%. 

Plug operates in many segments of the industry, from H2 plants to fuel cells to forklifts. It is building five plants throughout the country, producing 500 tons of green hydrogen by 2025. It uses hydropower from Niagara Falls and creates hydrogen fuel cell systems for customers like Amazon and Walmart.

The company received a lot of early hype from its H2-powered forklifts, though its new H2 van, a collaboration with Renault, is also impressive, carrying a payload of up to 1 ton and that can reach nearly 250 miles per tank.

PLUG had an ugly $62 million gross loss on its 4Q $219.0 million in revenue. It missed by 0.14 on EPS estimates. The ticker is down 58% for the year and has recently seen litigation over that plummet.

It has a cash burn issue that BE doesn’t have. It hit a three-year low on April 18 after an analyst sees the risk-off atmosphere for project financing via bank failures becoming a problem, just as PLUG wades into in the capital-intensive part of its growth cycle. Analysts don’t see profitability until late 2025.

 

Plug Power Past and Future

 

The losses look dire and the earnings graph looks ugly, though in all fairness it looks a lot like TSLA’s chart from 2017 to 2000.

The question for PLUG—and most of the sector—is whether the Department of Energy’s new H2 hubs could help it: Of the original 79 bids for DOE-subsidized hydrogen hubs, 22 were allowed. Seven to 10 will be chosen this fall.

Hydrogen ETFs may be down from their meme highs, but hub partnerships to be issued this fall—in addition to planned subsidies—will give the industry a much clearer path to profitability.

Sean Daly writes on ETFs, biotech and wealth management. He was educated at Columbia University and has taught international finance, computing and financial risk management at Pace, Tulane and Princeton. Follow him on Twitter (X) via @Sean_Daly_.