Early Stages
To be clear, hydrogen energy is in the very early stages. A cynic might call this new ETF a “moonshot” venture. But Defiance ETFs president Paul Dellaquila says it’s the type of forward-thinking concept that’s right up his firm’s proverbial alley.
“While it’s early, I think the ramp up will happen pretty quickly and this will be a story that goes on for decades,” he said. “We launched 5G [Defiance 5G Next Gen Connectivity ETF, ticker symbol FIVG] in 2019 and no one had 5G at that point. Our philosophy as a firm is we’d rather be early than late and we’d rather be leaders than be led, and that’s what we’re doing with this ETF.”
For the record, the FIVG fund now has $1.1 billion in assets and its share price gained nearly 30% last year, though it has underperformed year to date with a return of just over 1%. That fund, like the new HDRO fund, charges an expense ratio of 0.30%.
But getting back to HDRO, the fund tracks the BlueStar Hydrogen & NextGen Fuel Cell Index consisting of companies that get at least 50% of their revenue or operating activity from hydrogen energy or fuel cell projects. Companies are weighted on a float-adjusted market capitalization basis, with a maximum weight of 10% at each quarterly index reconstitution.
The fund’s top holdings include Plug Power Inc., British company ITM Power Plc and Norway-based Nel Asa, all of which are involved in producing, storing and distributing hydrogen energy. That runs the gamut from water electrolysis to fuel cell technology that converts hydrogen into electricity.
While the U.S. is the largest country weight in the fund at 32%, it’s a global portfolio that includes companies from the U.K., South Korea Canada, Norway and five other nations.
Dellaquila noted the fund could experience a tailwind given the Biden administration’s clean energy aspirations. Even so, he stressed that hydrogen energy is a global undertaking that won’t be dependent on any one country.
As cited by Defiance, Bank of America estimates that hydrogen could generate 24% of global energy needs by 2050, creating as much as $11 trillion in investment opportunities over the next three decades.
Regarding HDRO’s portfolio fit, Dellaquila sees it as a replacement for someone’s energy exposure. “But it will likely be a core complement position to someone’s S&P 500 exposure,” he said.