Hydrogen is incredibly foundational in many ways: It’s the first element on the periodic table; it’s the most abundant substance in the universe; its the fuel source for our sun; and it forms a partnership with oxygen to produce water. But can hydrogen be the foundation for a successful exchange-traded fund?
We’ll soon find out with today’s launch of the Defiance Next Gen H2 ETF (HDRO), an index-based product from Defiance ETFs that invests in companies engaged in the development of hydrogen-based energy sources and fuel technologies.
Hydrogen holds huge promise as a clean energy source. When burned, its only byproduct is water vapor.
It currently comprises a low-single-digit percentage of the world’s energy supply, and much of that involves the oil and chemical industries. And while hydrogen comprises roughly 90% of all atoms, it’s bonded to other elements including oxygen and carbon. As a result, hydrogen needs to be “produced” to separate it and make it usable for energy purposes. That typically entails heating natural gas with steam to form syngas, a combination of hydrogen and carbon monoxide. Hydrogen is then isolated from that mixture.
That’s not considered clean energy, particularly when fossil fuels are the heating source for this process. As such, this has been labeled as “gray” or “brown” energy. The goal is to produce so-called “green hydrogen” via renewable energy sources. And that—along with the overall hydrogen energy infrastructure that includes fuel cells—is what the HDRO fund aims to exploit.
HDRO is the fifth product offered by Defiance ETFs, a New York City-based asset manager focused on launching funds invested in thematic, cutting-edge technologies.
According to fund literature from Defiance, stand-alone hydrogen is a fuel source that can be stored and transported. And producing hydrogen through electrolysis is seen as having the greatest potential to generate sufficient levels of hydrogen fuel at a reasonable cost.
This process involves passing electricity through water to separate its hydrogen and oxygen molecules. Ideally, this is accomplished using renewable energy sources such as solar and wind, though historically this has been much more expensive than using fossil fuels. But falling costs for solar and wind energy make them more commercially viable for hydrogen production, and costs are expected to go lower in the future, according to Bank of America Securities.
Producing hydrogen for energy is one part of the equation. The other parts include storing and transporting it, as well as finding end users for it. Regarding the latter point, hydrogen fuel is making inroads via fuel cells for electric vehicles and hydrogen-powered forklifts in the warehouses of companies such as Amazon.com and Walmart. It’s also getting a boost from the introduction of fuel cell bus fleets in China and Europe. Meanwhile, hydrogen refueling stations are popping up in places such as California and in the U.K.
And Defiance notes that applications are being developed ranging from power generation and industrial fuel to uses in aerospace and shipping.