Hydrogen ETF – high risk or high-yield investment?
Due to the growing demand for energy, the raw material coal is still being used. It is the most climate-damaging source of energy. An increasing number of countries are looking for alternatives and cleaner ways to produce energy. One solution to this problem could be hydrogen. In this article, you will learn whether it could be an opportunity for investors and how you can invest in a hydrogen ETF!
In brief:
- Hydrogen offers a green alternative to fossil fuels.
- The state supports innovation with its own investments, which could positively advance further development.
- Be sure to pay attention to risks that may arise in order to prevent possible losses.
Water as a precious resource – investing in hydrogen?
To use the energy from brown coal, it has to be burned. Combustion releases large amounts of the greenhouse gas CO₂. The situation is similar when using anthracite. According to the German Federal Environment Agency, the energy industry is responsible for about half of all CO₂ emissions in Germany.
Germany also mined large quantities of brown coal and black coal, primarily in the Ruhr area, Lusatia and Brandenburg. Although Germany has since stopped mining black coal, it continues to import and use it. The future of brown coal power plants has already been decided.
In low concentrations, CO₂ is an important greenhouse gas and is responsible for the natural greenhouse effect. Greenhouse gases absorb infrared radiation emitted by the ground, which would otherwise escape into space. In this way, greenhouse gases prevent freezing temperatures on Earth.
In recent decades, however, the energy industry has caused an unnaturally sharp increase in CO₂ concentrations. The problem with this is that the high volume causes a retention of heat, which in turn increases the temperature of the earth.
The potential of hydrogen as a climate-friendly energy source
Governments around the world have set themselves the goal of significantly reducing their CO₂ emissions. One option for achieving this is hydrogen. It is a clean energy source and a promising alternative.
The climate agreement, which envisages a maximum increase in global temperature of 2 degrees, cannot be achieved without a zero-emission energy supply. Hydrogen is easy to transport and store. It can also be easily converted into energy. For example, it can be used in the mobility sector to power vehicles.
The European Union wants to increase the production of the gas, and Germany is also investing in it. This shows that many countries are planning for the long term with this form of energy, which will likely steadily increase demand.
Pure hydrogen is a colourless gas produced by electrolysis. It goes by different names depending on the source of the energy used to produce it: green, grey, blue, turquoise and violet hydrogen. Only the green variety is produced using renewable energy and is therefore climate-friendly.
As you have seen, hydrogen offers an interesting innovation for the future, as it can be produced in a climate-neutral way and could permanently advance climate protection. With the increased demand, you may be wondering how you could invest in the gas and how risky this investment would be.
Invest in hydrogen ETFs
The increased demand is generating more interest in this investment opportunity. In this context, you may be wondering ‘What should I invest in?’ One option is to invest part of your assets in exchange-traded funds that specialise in this area.
What are ETFs?
ETFs are index funds that can be traded on the stock exchange. This means that they are based on a specific index and try to track it as closely as possible, achieving its average return. Exchange-traded funds allow you to invest in a variety of securities, including stocks, bonds and commodities.
The special feature of this asset class is that it allows investors to invest in a wide range of securities. By buying an exchange-traded fund, investors can invest money in hundreds of companies.
This saves you a lot of effort that would be involved if, for example, you bought individual shares and had to research them in detail. An ETF Europe, for example, invests in many different European companies from various sectors.
The high number of different stocks also has another advantage: diversification or risk spreading. You may have heard of the MSCI World Index, which is very popular with beginners. With the help of this investment, you can invest in over 1,600 companies worldwide.
The low fees could give you another advantage. A basic distinction is made between active and passive funds. Active funds are composed by a fund manager, which is why they have higher running costs. The aim of active investments is to achieve an excess return.
Exchange Traded Funds are a passive type of investment. They follow their respective index. An investment in the DAX, for example, contains the 40 largest companies in Germany. Since no fund manager is needed, the costs are significantly lower, which means that your return is not reduced. You can reduce additional costs by comparing brokers.
Good to know:
The risk of this investment is reduced by spreading it across different countries, industries and companies. Possible losses in one company can be offset by the large number of other corporations and their returns. If you are looking for comparatively safe investments, ETFs could be a good choice.
This is a hydrogen ETF.
The investment on the energy source tracks an index that represents values from the gas sector. The companies included invest in different sectors, all of which are related to this form of energy. Examples may include:
- gas storage
- Supplier
- Production of the gas
- Mobility and transport of the gas
- industrial applications
- fuel cells
The large number of companies has the advantage that different groups with different focuses are represented in the hydrogen sector. This means that an investor has less risk than when investing in only one stock, which is presented by a single company.
An investment in such a sector could be worthwhile for you if you value social issues such as ethics or ecology. By investing, you could strengthen environmentally friendly companies and benefit from climate protection. Another option for this is a water ETF, for example.
One example in the energy sector is an ETF from VanEck that is based on the ‘MVIS Global Hydrogen Economy ESG Index’. Another option is the L&G, which follows the ‘Solactive Hydrogen Economy Index NTR’. Both try to reflect the international hydrogen market through a different composition.
You may wonder which exact companies are included. One of the companies included is Linde. The group is involved in the production, storage, distribution and application of hydrogen. One of its goals, for example, is to develop an innovative technology for refuelling trucks that offers increased speed and range.
Increased risk – you should watch out for this!
In the section on how exchange-traded funds work, you read about the advantage of diversification. Spreading across multiple countries, sectors and companies significantly reduces the risk of your investment, as losses can be absorbed by other companies.
Even if these exchange-traded funds invest in several companies, the risk diversification here is significantly limited in contrast to global world portfolios. This is because all the companies included invest in the same sector and are therefore less broadly based. Such investments are called thematic ETFs and carry an increased risk.
It is impossible to predict how certain sectors will develop. In the worst case, over-investing in a single area can lead to high losses. When investing, the following principle applies: never put all your eggs in one basket!
Accordingly, a specialised ETF is only suitable for you if you already have a broadly diversified portfolio. Experienced investors can assess the possible risks of their investments well and normally only invest a small amount in such an investment in order to reduce possible risks.
Attention!
If you are a beginner when it comes to investing, you should build a global, broadly diversified portfolio. If you have already acquired a great deal of knowledge and are interested in attractive opportunities for returns, this form of investment is for you.
Hydrogen ETFs: pros and cons
Below, we have put together a brief overview of the possible advantages and disadvantages should you consider investing in this area.
| Possible opportunities and advantages | Risks and disadvantages incurred |
| An increasing number of countries are investing in hydrogen and seeing it as one of the most important energy sources of the future. Investment by countries is contributing to development in this area. | The development of certain sectors is impossible to predict. There is no guarantee that the form of energy will prevail in the future. |
| The energy source enables renewable energy generation without the use of fossil raw materials. | At present, fossil fuels such as gas, coal and oil are still strong competitors. This is an investment in the future. |
| In 2021, hydrogen was legally categorised as an equivalent energy source. The legal classification shows increasing support. | Producing gas requires a lot of energy and is expensive. The development of this sector depends on further future innovations. |
| During the production of the gas, only hydrogen is produced, no harmful by-products. | Thematic ETFs are not sufficiently diversified and are similar to a bet on certain sectors in the future. They should only be considered by experienced investors. |
On the one hand, investing in hydrogen enables an investment in the future. There are signs that this area will continue to develop and that attractive opportunities for returns may arise. Such incentives include, for example, the support of various countries.
Attention!
On the other hand, such a development is impossible to predict. Invest only a small portion of your total wealth in an undiversified investment to avoid risk!
Conclusion: the hydrogen ETF as a high-risk investment with opportunities
As has been shown, hydrogen could be a big part of the energy transition in the future. An increasing number of countries are looking for alternatives to fossil fuels and support hydrogen as a green alternative.
Exchange Traded Funds offer a cost-effective and high-yield way to invest in this area. They have comparatively low fees and include a wide range of companies. You can buy an ETF or set up a savings plan.
Nevertheless, hydrogen ETFs are a risky type of investment, as it is not certain how the market in this sector will develop and whether the energy source will succeed in establishing itself.
This type of investment is only recommended if you are investing a small amount, already have a diversified portfolio and are an experienced investor. Find out more about ETFs here or learn more about ‘What are dividends?’
FAQ – Frequently asked questions about hydrogen ETF
