Cannabis ETFs — Should You Invest?

Just last year in early 2017, cannabis ETFs didn’t exist. Sure, there was speculation — but that’s it. Fast forward to today and cannabis ETFs have become a budding industry.

But what cannabis ETFs are on the market and what are their holdings? Currently there are two major cannabis ETFs on the market in Canada, with more on the horizon.

Here, the Investing News Network takes a look at the three major cannabis ETFs and what they have to offer investors. Read on to learn more about them and why investing could be worthwhile.

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Options for investing in cannabis ETFs

While cannabis ETFs are a relatively new development there are already many options for investors. Below we run through a few that offer exposure to different aspects of the cannabis landscape.

The Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) was the first marijuana ETF on the block, officially launched by Horizons ETFs in April 2017.

It is comprised of different cannabis-related stocks, with its 10 top holdings being: Canopy Growth (TSX:WEED), Aurora Cannabis (TSX:ACB), Aphria (TSX:APH), Scotts Miracle-Gro (NYSE:SMG), GW Pharmaceuticals (NASDAQ:GWPH), Cronos Group (TSXV:MJN), Canntrust Holdings (CSE:TRST), Hydropothecary (TSX:HEXO), Organigram (TSX:OGI), the Green Organic Dutchman (TSX:TGOD) and INSYS Therapeutics (NASDAQ:INSY).

The ETF’s net assets stand at $ 975 million and it charges a management fee of 0.75 percent plus applicable sales tax to its shareholders. It is rebalanced quarterly as part of its continued growth.

Horizons ETFs offers a number of other cannabis ETFs aside from this one, including the Horizons Emerging Marijuana Growers Index ETF (AQN:HMJR).

The Alternative Harvest ETF (ARCA:MJ) is more of an international affair as it tracks both Canadian and American cannabis companies, as well as several other assets from around the world. It was the first cannabis ETF to be offered in the US.

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The ETF was officially incepted back in 2015; however, this is a bit of a misnomer because the fund was previously known as the Tierra XP Latin America Real Estate ETF. As the name suggests, it was focused on real estate assets. Alternative was not a cannabis holdings ETF until late December 2017.

Alternative holds a number of cannabis-related stocks. Its 10 top holdings include many of the same companies as Horizons: Cronos Group, Canopy Growth, Aurora, Canntrust, Hydropothecary, GW Pharmaceuticals, the Green Organic Dutchman and Organigram. Plus it has Tilray (NASDAQ:TLRY) and Emerald Health Therapeutics (CSE:EMH).

It also holds roughly 20 other stocks in the tobacco and pharmaceutical industries. And because it is not limited to Canada- or US-based companies, companies from as far away as Denmark are included in the ETF. Like Horizons, Alternative charges a management fee of 0.75 percent plus tax to its shareholders. Its assets currently stand at US$ 457 million.

Then there’s the Evolve Marijuana ETF (TSX:SEED). Evolve launched back in February 2018 and has assets totaling $ 6.6 million, making it the little guy on the block.

Evolve has 20 holdings, most of which are Canadian; however, it has some Australian coverage in the mix. Its 10 top holdings are roughly the same as the two other cannabis ETFs above: Aurora, Canopy Growth, Cronos, Aphria, Hydropothecary, CannTrust Holdings, OrganiGram, TerrAscend and CannaRoyalty. Unlike the other ETFs, the fund also has Neptune Technologies (TSX:NEPT) in its top 10.

Again, Evolve’s management fee is 0.75 percent. Where Evolve sets itself apart from the other two cannabis ETFs discussed is that its portfolio includes the following sectors: consumer discretionary, consumer staples, financials and industrials. That means that in addition to cannabis- and healthcare-related stocks, the ETF is diversified across a number of other verticals.

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How have cannabis ETFs performed?

The majority of cannabis stocks — and ETFs by extension — seem to experience sometimes extreme swings in conjunction with legislative announcements, whether Canadian or American. Here’s a brief look at how the three detailed above have fared since they hit the market.

Horizons has fared well since its inception. Yes, it has had its share of ups and downs, but those peaks and valleys are much less pronounced than they have been for the individual companies the ETF represents. See its chart below:

Chart via Yahoo Finance.

Alternative has had a steadier performance — although it took a steep fall before it debuted its cannabis holdings at the end of December of last year, it quickly rebounded. See its chart below:

Chart via Yahoo Finance.

For its part, Evolve has undergone many of the same ups and downs as the other ETFs. As you can see below, the ETF started off with a bang and then quickly deteriorated in value within weeks of launching. It oscillated in its slump until mid-June, around the time when the Canadian Senate voted to pass the bill legalizing cannabis in October 2018.

The ETF also got a boost in August following other industry announcements. including the $ 3.8-billion investment in Canopy Growth by Constellation Brands (NYSE:STZ).

Chart via Yahoo Finance.

Why you might like to invest in cannabis ETFs

The general sentiment on cannabis is bullish, and many investors believe cannabis ETFs are a good way to gain exposure to the sector without having to pick individual stocks. As indicated above, there are many different ETFs to choose from, meaning that investors can use them to cater to their needs.

What’s more, ETFs are potentially a safeguard against volatility. Stocks in the industry are known for taking sharp ups and downs, and investing in cannabis ETFs gives those interested in the space the opportunity to get into the sector while enjoying broad exposure and hopefully lower risk.

Cannabis ETFs can also offer protection against legalities, a major hurdle when it comes to cannabis. For example, an announcement that Attorney General Jeff Sessions would be rescinding non-interference marijuana policies has meant that cannabis companies with US assets could get shut down by federal officers at any time.

This has, of course, affected cannabis stocks and made investors wary of marijuana stocks, particularly those with US assets. Investing in a cannabis ETF with coverage of both Canada- and US-focused stocks could provide some peace of mind for investors.

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And why you might choose not to do so

While there is a lot of positivity surrounding cannabis ETFs, there is also a much “buyer beware” sentiment.

Cannabis has been called a highly speculative market, and even a green bubble by some. The great unknown is whether stocks will soar or sink after legalization. Then there’s the question of what will happen when Big Pharma inevitably arrives.

On a different note, analyst Alan Brochstein wrote in Forbes that he doesn’t believe cannabis ETFs are a buy yet. While Brochstein has a fairly US-specific investor lens, he does bring up some interesting points.

He indicates the flaws in various ETFs, which include lack of growth compared with investing in large LPs individually. When seen on a graph, it becomes apparent that the largest gains are being made by individual companies. Brochstein cites the inclusion of lesser cannabis-related companies, such as Scotts Miracle-Grow in HMMJ, as a possible cause of the fund’s comparative lag in the space.

Would you invest in a cannabis ETF? If so, which one? Let us know in the comments below.

This is an updated version of an article published by the Investing News Network earlier in 2018.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Amanda Kay, hold no direct investment interest in any ETFs mentioned in this article.

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