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Thematic ETFs Q1 performance examined

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Thematic ETFs had a rough first quarter, falling as much, or more than global share market gauges like the MSCI World Index. The slow start follows two strong years in 2020 and 2021, where several thematics provided strong outperformance. Biotech in many ways exemplifies this reversal of fortunes. After being the best performing sector in 2020, thanks to coronavirus vaccine development, the sector fell 40% in the 12 months to Q1.

While the causes of underperformance vary between funds, common roots include the Russian invasion of Ukraine, which threatens supply chains. And the Federal Reserve’s hawkish stance, which has put a dampener on growth companies. Below we look at each thematic in more detail.

ETFS Hydrogen ETF (HGEN)
  • HGEN fell 11.5% in Q1, thanks to rising interest rates and Senator Manchin vetoing US subsidies for clean hydrogen.

  • HGEN is especially sensitive to higher discount rates as the majority (16 out of 30) of the companies it holds are loss-making. While HGEN’s performance is negative this year, in March, HGEN rallied 12.8% on a more dovish Fed).

  • Build Back Better generated a lot of optimism and buzz around clean hydrogen as it included vast subsidies. Its veto by Manchin was a major setback.

  • However, Russia’s invasion of Ukraine has sent (methane) gas prices soaring, making green hydrogen more appealing and cost-competitive. A major barrier to clean hydrogen uptake has been cost.

    • Clean hydrogen pure-plays in HGEN include Nel ASA, PowerCell Sweden, Fuelcell Energy, Fusion Fuel Geren, and others.

  • Long-term investors may use the drawdown as a more attractive entry point into the hydrogen economy, just as global investments in this space are ramping up.

    • The number of countries with a hydrogen strategy doubled in 2021 from 13 to 26, with Bloomberg expecting 22 more to follow this year.

  • National and corporate net-zero goals will drive clean hydrogen demand.

    • The US and Europe will see hydrogen projects finally begin construction this year, backed by a wave of policy support and funding.

    • Public and private sector funding for green hydrogen amounts to over $337 billion, with more than 90 industrial green hydrogen projects under development worldwide.

    • The cost of green hydrogen is expected to fall rapidly through to 2030, with Bloomberg predicting it will be cheaper than natural gas by 2050.

Learn more about HGEN

ETFS Battery Tech & Lithium ETF (ACDC)
  • ACDC fell 10.3% in Q1, putting it almost neck-and-neck with the MSCI World. This made it one of the better performing thematics.

  • ACDC has a mix of growth and value companies, the latter namely being a number of the car manufacturers, giving it less of a growth bias than other thematic ETFs.

  • Russia’s invasion of Ukraine negatively impacted the fund, particularly weighing on the European companies in the index. ACDC’s European exposure was just under 20% at the end of Q1 2022.

    • Specific European companies that dipped in Q1 were:

      • BMW -13.5%

      • Daimler -21.5%

      • Mercedes -7.4%

      • Renault -23.4%

  • The Ukraine war has also driven up the price of Nickel (+132% at its YTD peak) as Russia is a major producer denting battery producers like LG Chem, TDK Corp and Panasonic.

  • However, investors bought the dip in Q1, with ACDC continuing to see inflows.

  • The fundamentals of battery tech remain sound. EV sales doubled in 2021 with 6.6m sold globally.

  • China is a big driver of this growth, with 3.3m EVs sold last year and EVs now make up over 11% of the car market in Western Europe.

  • Policy shifts and manufacturing targets are driving the growth:

    • US government announced 50% electrification target for new cars, supported by 500k charging stations by 2030.

    • EU proposed to bring CO2 emissions standards for new cars to zero by 2035.

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