Cannabis stocks are getting a lot of attention, but what about cannabis exchange-traded funds (ETFs)?
Now that the cannabis industry is beginning to mature, these marijuana-focused investment vehicles have become a budding part of the overall financial market.
Understandably, investors may have a few questions about what cannabis ETFs are available, what stocks they hold and what the key risk differences are between funds. Luckily, there are already many publicly traded cannabis ETF options for investors looking to score in the marijuana industry.
4 options for investing in cannabis ETFs
Here’s a look at four cannabis ETFs that offer exposure to different aspects of the cannabis landscape. Read on to learn more about them and why investing could be worthwhile.
1. ETFMG Alternative Harvest ETF (ARCA:MJ)
The ETFMG Alternative Harvest ETF is 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. The ETF was officially created back in 2015, but 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; it morphed into a cannabis ETF in December 2017.
The fund now holds a few dozen cannabis-related stocks in its portfolio. It also holds roughly 20 other stocks in the tobacco and pharmaceutical industries. Because it is not limited to Canada- or US-based companies, firms from as far away as Denmark are included in the ETF.
ETFMG Alternative Harvest ETF’s performance since inception. Chart via Google Finance.
As of November 10, 2020, the ETFMG Alternative Harvest ETF’s top five holdings were: Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC,TSX:WEED), Cronos Group (NASDAQ:CRON,TSX:CRON), Aurora Cannabis (NYSE:ACB,TSX:ACB) and GW Pharmaceuticals (NASDAQ:GWPH).
The ETF has an expense of 0.75 percent for its shareholders, and its assets under management currently stand at about US$771 million.
2. AdvisorShares Pure Cannabis ETF (ARCA:YOLO)
Next up is the AdvisorShares Pure Cannabis ETF, which was the first US-listed active ETF dedicated to cannabis exposure. It was officially launched in April 2018.
The fund serves as an index that allows investors to gain pure cannabis exposure to both domestic and foreign cannabis equity securities.
AdvisorShares Pure Cannabis ETF’s performance since inception. Chart via Google Finance.
As of November 10, 2020, the AdvisorShares Pure Cannabis ETF’s top five holdings were: Innovative Industrial Properties (NYSE:IIPR), Village Farms International (NASDAQ:VFF,TSX:VFF,), GW Pharmaceuticals, GrowGeneration (NASDAQ:GRWG) and Green Thumb Industries (CSE:GTII,OTCQX:GTBIF).
The ETF’s assets under management come in at around US$78 million, and a net expense ratio of 0.74 percent for its shareholders.
3. Pure US Cannabis ETF (ARCA:MSOS)
AdvisorShares recently launched a second ETF, the Pure US Cannabis ETF, which is unique in that it is the first US-listed active ETF offering exposure solely to US-listed cannabis stocks, including multi-state operators involved in legal cannabis production and distribution.
The US listing for this ETF took some time for AdvisorShares to achieve because cannabis remains federally illegal in the country. “It took a great deal of behind-the-scenes work to get this fund approved,” said Dan Ahrens, managing director and chief operating officer with AdvisorShares.
Ultimately, the fund doesn’t directly invest in US cannabis companies, but rather through swap options — derivative contracts — that allow for indirect exposure to these companies.
Other ETFs from Evolve ETFs and Horizons ETFs Management (Canada) also offer exposure to the US market, but they are listed on Canada’s NEO Exchange.
Pure US Cannabis ETF’s since inception. Chart via Google Finance.
As of November 10, 2020, the Pure US Cannabis ETF’s top five holdings were: Green Thumb Industries, Curaleaf Holdings (CSE:CURA,OTCQX:CURLF), Cresco Labs (CSE:CL,OTCQX:CRLBF), Trulieve Cannabis (CSE:TRUL,OTCQX:TCNNF) and Innovative Industrial Properties.
It has a net expense ratio of 0.74 percent and assets under management of approximately US$46 million.
4. Innovation Shares Cannabis ETF (ARCA:THCX)
Then there’s the Innovation Shares Cannabis ETF, which launched in mid-2019 “as the first passively managed pure-play ETF aimed at cannabis investing.” Its assets under management are valued at about US$29 million.
The goal of this fund is to provide investors with a low-cost means of gaining exposure to the marijuana market through a diversified portfolio of cannabis-connected stocks. The fund has an expense ratio of 0.7 percent.
The ETF follows the Innovation Labs Cannabis Index, a cap-weighted benchmark portfolio of a few dozen stocks expected to benefit from growth in the legal hemp and cannabis sectors.
As of November 10, 2020, the Innovation Shares Cannabis ETF’s top five holdings were: Canopy Growth, GrowGeneration, Tilray, Cronos Group and Aphria (TSX:APHA,NASDAQ:APHA).
Reasons to invest in cannabis ETFs
Although the cannabis industry has had some setbacks, the general sentiment 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 specific needs and interests.
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 hurdle when it comes to investing in cannabis.
For example, marijuana remains federally illegal in the US, although many individual states have developing medical and recreational markets. Investors who want exposure to both Canada- and US-focused stocks could minimize their worries about the American market by putting their money into an ETF with exposure to companies in both countries.
Potential downside to cannabis ETFs
Cannabis has been called a highly speculative market, and even a green bubble by some. While legalization is becoming more common, one great unknown is the US market, where the drug remains federally illegal. Another key question is what could happen when Big Pharma inevitably arrives.
There are many more considerations as well, and these may make investors hesitate to enter the market.
Looking more specifically at ETFs, analyst Alan Brochstein wrote in Forbes in 2018 that he didn’t believe cannabis ETFs were a buy at that time — much more recently he referred to these funds as “gimmicks.” While Brochstein has a fairly US-specific investor lens, he did bring up some interesting points.
He indicated the flaws in various ETFs, which include a lack of growth compared to investing in large producers individually. Indeed, when seen on a graph, it becomes apparent that the biggest gains are generally made by specific companies, not by any cannabis-focused ETFs.
Brochstein also noted that sometimes cannabis ETFs include companies that are less related to marijuana, saying that may cause them to lag.
In mid-2020, Brochstein took a swipe at the ETFMG Alternative Harvest ETF, describing it as too “heavily exposed” to the major Canadian licensed producers (LPs). His take was that the fund’s “massive bet on the largest LPs … misses what we think may be the very best part of the market: American cannabis operators and ancillary companies.”
As mentioned, there are some ETFs that solely offer exposure to the American cannabis market, but only one is listed in the US. It’s up to investors to take criticisms like this in hand and decide what works for them.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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