Introduction to the Marijuana Sector
Marijuana or Cannabis; be it the use or production was once clouded in controversy. However, the industry has gone through major leaps and bounds in recent years. The still nascent industry is forecast to reach $97 billion globally by 2021.
Over the past few years, the marijuana industry has become somewhat of a gold rush. In 2016 alone, the legal marijuana market had an estimated revenue of over $7 billion. The next few years are expected to see further room for growth.
Marijuana and the United States of America
In the United States, Marijuana is going through the legalization process at an extremely slow pace state-by-state.
The District of Columbia, along with nine other states in the U.S. has legalized marijuana for recreational use. Even more states are expected to join in legalizing marijuana. As a result, investors are hoping to take advantage of the market early before it reaches mass hysteria.
Well, in this article, we will take a step-by-step approach for how to invest in Marijuana ETFs, so you also take advantage of this investment opportunity.
I mean who wouldn’t want to invest in the next Budweiser of marijuana?
Canada – Legalization of Marijuana
One nation that is keeping investors excited is Canada. Canada was the world’s first nation to legalize medical marijuana in 2001.
Canada is also expected to legalize the use of marijuana for recreational purposes this year. At the time of this writing, Canada’s House of Commons has already approved the legislation.
Despite the legalization, there are quite a few details to work out. But this has not deterred market watchers and marijuana investors alike from staying optimistic.
A number of companies have already prepared plans in the run up the legalization of Marijuana for recreational use.
Global spending is expected to grow by over 200% to $32 billion by 2020 in the United States alone, data from market research firm Arcview/BDS analytics show.
Estimated Consumer Spending in Legalized Marijuana (Source: Arcview Market Research/BDS Analytics)
It is not just Canada, but Germany as well. Germany allows the use of medical marijuana through its 20,000 pharmacies.
Many more nations are expected to follow suit. This makes marijuana investment uniquely positioned.
What are the Top Three Companies in the Marijuana Sector?
Before you invest in Marijuana ETFs, it is important to become familiar with the top publicly listed companies in the sector.
Scotts Miracle-Gro (NYSE:SMG) is a NYSE listed marijuana stock. It has a market cap of $4.85 billion with price to earnings ratio of 20.56. The stock also has a 2.43% dividend yield.
The company is domiciled in the United States. After losing over 20% since early February 2018, the stock is currently a hold. Trading $86.31, analysts estimate a one-year price target of $93.
The decline in the stock is attributed to temporary factors such as regulation and implementation issues in California. The company had recently acquired Sunlight Supply making it the largest hydroponics supplier in the U.S.
The potential opening up of markets in Michigan and Massachusetts are expected to push the price higher in the coming months.
Canopy Growth Corp
Canopy Growth Corp (NYSE:CGC) is another stock on the NYSE. The company has a market cap of $5.95 billion and has generated strong returns since going public.
Canopy Growth is a Canadian based grower and on a year-to-date basis, the share price has surged 25%. The company focuses on the use of recreational marijuana which is expected to open up this year. With its main focus in Canada and the speculation of Canada easing rules on cannabis use, the company is expected to keep the momentum going.
Besides Canada, Canopy Growth also has a presence in Germany. The fiscal fourth quarter results showed record sales in the country.
Looking forward, Canopy Growth is currently working on a marijuana infused beverage which is keeping investors excited.
Aphria Inc. (TSX:APH) is a Canadian marijuana company that trades on the Toronto Stock Exchange. The business model is similar to that of Canopy Growth. The stock has been down over 30% this year.
Aphria Inc. has a market cap of $2.48 billion with a higher price to earnings ratio of 58.48.
The strong point for the company is its retail distribution network. Along with Canopy Growth, Aphria Inc. will likely surge once Canada passes the bill on recreational use of marijuana.
The recent deal with Southern Glazer’s a wine and spirits distribution company is also expected to follow in the footsteps of Canopy Growth with a beverage.
Some reports suggest that Aphria Inc. is in talks with Molson Coors Brewing for a potential deal in the cannabis infused beverage business.
The North American Medical Marijuana Index
As with any sector, an index is the best place to start if you are not very familiar with individual stocks.
The North American Medical Marijuana Index, as the name suggests, tracks the performance of a basket of listed companies. The companies in the composition of the index have significant business exposure to the marijuana industry.
Companies need to be a producer or a supplier to be listed on the North American Marijuana index. It also includes biotechnology companies focusing on research and development of cannabis.
At the time of this writing, the North American Marijuana index has 49 companies listed.
Almost all of the companies listed in the index are domiciled in Canada (74%), the U.S. (16%) and Great Britain (10%). The index also reinvests the dividends.
Since its inception in 2017, it has yielded impressive returns of 35% per annum.
North American Medical Marijuana Index
A Primer on Marijuana ETFs
As of the first quarter in 2018, there are just five marijuana ETFs that investors can choose from.
Below we have provided write-ups on all five.
#1 Horizons Marijuana Life Sciences Index ETF (HMMJ)
- The HMMJ ETF trades on the Toronto Stock Exchange (TSX).
- It has a portfolio of U.S. publicly listed life sciences companies active in the Marijuana sector.
- The ETF currently boasts $80.9 million Canadian dollars in assets under management.
- The HMMJ fund has a management fee of 0.75%.
- The Horizons Marijuana Life Sciences Index ETF tracks the performance of the North American marijuana index, minus expenses.
HMMJ – Total Returns
- Companies listed in the HMMJ fund must have a market capitalization of C$75 million.
- Besides the market cap, the listed companies also need to meet some liquidity requirements.
- In terms of daily average volume, the listed companies should have an excess of C$250,000.
The fund’s top three holdings are:
- Aurora Cannabis Inc. (TSX: ACB) – 16.6%
- Canopy Growth Corp. (NYSE: CGC) – 14.8%
- Aphria Inc. (TSX: APH) – 11.6%
#2 Horizons Junior Marijuana Growers Index (HMJR)
- As the name suggests, the Horizons Junior Marijuana growers index ETF tracks companies that cultivate or produce marijuana.
- The companies listed here are small cap companies in North America.
- The HMJR marijuana ETF has an inception date of February 2017.
HMJR – Total Returns
- Currently, the Horizons Junior Marijuana Growers index ETF has C$10 million in assets under management.
- This marijuana ETF is unique as it focuses on companies generating revenue from distribution and cultivation.
- Companies listed in this ETF have a market cap from $50 million up to $500 million.
- The Horizons Junior Marijuana Growers Index ETF has an expense fee of 0.85%.
HMJR allocates 20% of its holdings toward companies based outside the United States. Compared to HMMJ ETF, you won’t find the traditional stalwarts of the industry.
Due to the small market cap and the rather small assets under management, this ETF yields higher returns. But the higher returns also come at the risk of higher volatility.
#3 Evolve Marijuana ETF (SEED)
- The Evolve Marijuana fund aims to provide investors with long term capital appreciation by investing in a diversified set of stocks.
- The SEED ETF has a portfolio distribution of 94% from Canadian companies and 6% from Australia. This offers a certain level of safety when it comes to the SEED ETF.
The top three holdings in SEED ETF are:
- Aurora Cannabis Inc. (TSX: ACB) – 16.6%
- Canopy Growth Corp. (NYSE: CGC) – 12.6%
- Medreleaft Corp. (TSX: LEAF) – 10.3%
SEED ETF – Total Returns
- SEED ETF has high expense ratio of 1%, made up of 0.75% in management fee and 0.25% in administration fee.
- There is a total of 23 holdings in this ETF with $4.95 million in assets under management.
#4 AdvisorShares Vice ETF (ACT)
- ACT is a unique ETF due to its composition. For one, ACT invests in companies that are on the U.S. stock exchange.
- The companies selected in the ETF have at least 50% of revenue from alcohol, tobacco or cannabis products.
- As part of a balance, the ACT ETF also invests 25% of its assets into the consumer stables sector.
- The ACT ETF also pays dividends.
- On a year to date basis, ACT has a return of 0.60%.
AdvisorShares Vice ETF (ACT) – Total Returns: 0.60%, (ytd)
Although ACT is not a pure marijuana ETF, the composition helps to ensure bringing diversity. The ACT ETF was issued in December 2017 and is an open-ended fund. AdvisorShares Vice ETF has an expense rate of 0.75% with $13.14 million in assets under management.
#5 Alternative Harvest ETF (MJ)
- The Alternative Harvest ETF is an open-ended ETF which invests in a market cap weighted list of firms.
- The companies on this ETF are cultivate, produce and distribute Cannabis.
- The MJ ETF is a pure marijuana ETF, but it also holds stocks of fertilizer companies, plant food and pesticides.
Alternative Harvest ETF (MJ) – Total Returns: 5.08% (1-year)
- There are about 30 stocks currently on the MJ ETF.
- The Alternative Harvest ETF has an expense ratio of 0.75% and boasts of $387 million in assets under management.
How to Purchase Marijuana ETFs?
It is obvious that most of the companies in the marijuana sector are based in Canada or outside the U.S.
In the U.S., to purchase marijuana ETF’s, you need to have an account with an online broker. You can of course purchase the U.S. based ETFs – Alternative Harvest ETF (MJX) and AdvisiorShares Vice ETF (ACT).
In order to purchase the Canadian ETFs, you will need the assistance of a local broker who can then execute the order on your behalf.
Marijuana ETF investors who are non-residents of Canada cannot hold more than 40% of the ETF’s units.
Most marijuana ETFs, such as the Horizon ETFs are not regulated by the Securities and Exchange Commission (SEC).
Risks of Investing in Marijuana ETFs
Although the industry is still in the early stages and that it offers a great potential, there are some risks.
A great example of this is the ETFMG Alternative Harvest ETF. The marijuana ETF started off with a bang in early 2018. The ETF attracted over $400 million of net inflows. A few months later, the ETF’s net inflows began to fall.
A major part of this decline of inflows is due to the legislative efforts in the U.S. A few months ago; the Trump administration announced that it would let the states decide on whether to legalize marijuana use.
Investing in Marijuana ETFs – Conclusion
Investing in marijuana ETFs does offer investors a way to earn higher returns. Due to the volatility in the marijuana ETFs it is not advisable for all investors. The uncertain regulatory environment, possible consolidation and the high beta of the stocks are some things to consider.
Still, for investors who are willing to take risks, jumping on board the marijuana train can certainly offer benefits.
As with anything, it is imperative that investors understand their risk profile before investing in marijuana ETFs.