Marijuana ETFs and the General Election
Regulatory frameworks for marijuana use:
Marijuana use in the US has a long history of regulation at the federal and state levels. The medical use of marijuana has been approved with some restrictions in several states including New York, New Jersey, Montana, District of Columbia, Guam, Puerto Rico and U.S. Virgin Islands. Each state has its own restrictions on the mode of marijuana use, the way it is made available and the level of the psychoactive ingredient (tetrahydrocannabinol or THC) that it sees as permissible when used for medical purposes. Fewer states have adopted recreational marijuana for adults including California, Massachusetts, Michigan and Washington DC. Let’s take a look at Marijuana ETFs and the General Election.
Marijuana is also known as cannabis or hemp and remains illegal at the federal level despite several states adopting frameworks for its use for medical and recreational purposes. The lack of support at the federal level for this rapidly growing industry has created uncertainty and volatility in marijuana stocks. Since several of marijuana companies that grow, product and sell marijuana products are small or even microcap, liquidity risk is high: investors seeking to trade may find the price becoming increasingly unattractive for larger trades.
Besides the approval for marijuana use by different states, the larger trend in recent times has been towards the adoption of legal frameworks for marijuana, contingent upon the purpose, amount and way of use.
In 2018, GW Pharmaceuticals’ epilepsy treatment was the first medical use of marijuana to be approved by the Food and Drug Administration.
Several acts and ancillary propositions concerning the use of marijuana have also been on the ballot for some years now. While this legalization has facilitated the growth of the industry itself, other industries have also received impetus from it.
Banking services to marijuana companies have been increasing with both commercial banks and credit unions extending their support.
The Secure and Fair Enforcement Banking Act passed the house in 2019. If enacted into law, depository institutions will get the support to supply financial services such as loans to the marijuana industry.
Earlier in 2018, The Farm Bill removed legal marijuana that contained less than 0.3% of the psychoactive ingredient from its list of controlled substances at the federal level. This action allowed a cluster of services to support legal marijuana.
Regulatory action continues to be at the center of debates in the industry. In the upcoming elections in November, four states are voting on the legalization of marijuana adult use for recreational purposes: Arizona, Montana, New Jersey and South Dakota. South Dakota, along with Mississippi will also be voting on the legalization of the medical use of marijuana. Oregon also has propositions for voters for legal approval of medical treatment through psilocybin mushrooms and of low-level possession of all drugs.
This value migration of marijuana from illicit to legal sales in several states has been attracting investors and while this makes some marijuana stocks attractive, the volatility in the sector may make ETFs a better option since investors will be able to spread their risk . However, marijuana ETFs have also been seeing some volatility and price action as this migration unfolds.
While the uncertainty in the several aspects of legalization has resulted in increased volatility, the growth potential after federal legalization puts US marijuana companies on par with their peers in Canada, which has legalized marijuana use, can be tremendous. Publicly traded companies such as Tilray Inc., Aurora Cannabis, Cronos Group, GW Pharmaceuticals PLC and Aphria Inc. are top holdings in several US and global marijuana ETFs which may be attractive in the current environment that seems to favour legalization.
With an increasing momentum in the transition to legal marijuana, and with several outcome likely to become evident after the elections, marijuana ETFs may become more volatile as investors seek to capture the significant opportunity that legalization would open up.
Besides market sentiment driven volatility, these ETFs are likely to remain volatile due to their small cap holdings as well which may directly affect liquidity. All of these ETFs trade on NYSE ARCA however they do not all track indexes and this makes it more difficult to have a comparative assessment of the composition, weightage, turnover, and performance of marijuana ETFs. Further, almost all marijuana ETFs have a recent date of inception and hence data regarding past performance is limited.
Top Marijuana ETFs
AdvisorShare’s Pure Cannabis ETF, YOLO, has $57 million in assets under management and an expense ratio of 0.74%. With an inception date of 2019, it has a significant cash position and has top holdings in Village Farms International Inc., Innovative Industrial Properties Inc., GW Pharmaceuticals PLC, GrowGeneration Corp, and Arena Pharmaceuticals Inc.. YOLO has returned 2.17% year to date.
The Cambria Cannabis ETF TOKE was also launched in 2019 and has $11 million in assets under management and an expense ratio of 0.42%. Its top holdings include GW Pharmaceuticals PLC, Constellation Brands INc., Aphria Inc., Scotts Miracle-Gro co., and Innovative Industrial Properties Inc. The fund is down 19% year to date. Its holdings are predominantly in the US with a few in Canada and Britain.
The Amplify Seymour Cannabis ETF CNBS was launched in 2019 and has $5.6 million in assets under management. With an expense ratio of 0.75%, its top holdings include GW Pharmaceuticals PLC. Canopy Growth Corp., Innovative Industrial Properties Inc., GrowGeneration Corp and Aphria Inc. The fund is down 7. 46% for the year.
The Indxx MicroSectors Cannabis ETN, MJJ, issued by BMN Financial Group in 2019 has $31 million in assets under management and was launched in 2019. Its top holdings are Mettler-Toledo International, Agilent Technologies, Waters Corp, Abbvie Inc., and Thermo Fisher Scientific Inc. It has returned 9.62% year to date and tracks the Indxx MicroSectors North American Cannabis Index.
The Cannabis ETF THCX was also launched in 2019 and has $19.4 million in assets under management. The fund is down 26.3% for the year and tracks the Innovation Labs Cannabis Index. With an expense ratio of 0.70%, its top holdings include Aphria Inc., Scotts-Miracle Gro Co., GrowGeneration Corp., Canopy Growth Corp., and Cronos Group Inc.
The Global X Cannabis ETF POTX tracks the Cannabis Index and was launched in 2019. With 0.50% in expense ratio, it is down 44% for the year. Its top holdings include Aphria Inc., Canopy Growth Corp., and Cronos Group Inc., GW Pharmaceuticals PLC and Tilray Inc. It has $12.7 million in assets under management.
AdvisorShares Pure US Cannabis ETF MSOS was launched in September 2020 with $11 million in assets under management. Its top holdings include InnovativeIndustrial Properties Inc., GrowGeneration Corp., Arena Pharmaceuticals, Power REIT and cbdMD Inc. It holds 62% in cash and has returned 13.6% in four weeks.
AdvisorShares Vice ETF ACT was launched in 2017and has $9.7 million in assets under management. Its expense ratio is higher at 0.99% and its top holdings are Boston Beer Co., Thermo Fisher Scientific Inc., PerkinElmer Inc., Abbott Industries and LVMH Moet Hennessey Louis Vuitton SE. It has returned 8.93% year to date.
The Indxx Microsector Cannabis ETF MJO was launched in 2019 and has $9.5 million in assets under management. With an expense ratio of 0.95 % it has returned 5.4% for the year. Its top holdings are
Mettler-Toledo International INc., Agilent Technologies, Waters Corp, Abbvie Inc., and Thermo Fisher Scientific Inc. It tracks the Indxx MicroSectors North American Cannabis Index (200%).
The ETFMG Alternative Harvest ETF MJ was the first of its kind to be listed in the US. Top holdings include Canopy Group, Cronos Group, Tilray Inc,, GW Pharmaceuticals PLC and Hexo Corp. With $572 million assets under management, the fund is down 32% for the year. With an expense ratio of 0.75%, the fund tracks the Prime Alternative Harvest Index. Though launched initially as a Latin American real estate ETF in 2015, it has since changed into a pure cannabis play.
Marijuana ETFs can offer a lower risk instrument for investing in marijuana companies. However, these ETFs are of recent inception dates with a few having launched as recently as last month. The small and microcap composition of these ETFs increase liquidity risk and since several of these ETFS do not track an index, it is difficult to benchmark their performance.
Nonetheless, with marijuana being hotly debated in several states as the election approaches, and in an environment that seems to favour the legalization of marijuana for both medical and adult recreational purposes, the growth of the industry seems promising. Marijuana ETFs can help investors who are aware of the risks find a way to participate in this growth without taking a concentrated position in single companies.
Please Do Your Own Due Diligence before making any trade or investment decision.