In The World Of Cannabis ETFs, Active Management Proves A Decisive X-Factor

As the array of publicly listed cannabis companies expands, so too does the number of cannabis ETFs available to investors looking for a diversified slice of the action. Nearly a half-dozen new cannabis ETFs have started trading in the past three months alone. 

Even though it is still early days in the cannabis space, some trends are emerging within many of the existing funds. One core aspect of differentiation that is playing out in the nascent industry’s broad equity funds is management. Below is the one-year chart for a couple of the longest-running cannabis ETFs, the Evolve Marijuana Fund SEED and the Horizons Marijuana Life Sciences Index ETF HMMJ.

Source: Yahoo Finance

The difference in performance is quite clear, with the actively-managed SEED outperforming the index-pegged  HMMJ by more than 4,000 basis points over the past 52 weeks. 

Not only is SEED outperforming its peers, but it is also the best performing Canadian ETF over the past 52 weeks. What’s more, SEED has even topped the one-year performance of the world’s largest cannabis company, Canopy Growth Corp. CGC, by more than 2000 basis points.

Source: Yahoo Finance

Although less popular than their passive counterparts, active management in emerging industries like cannabis can deliver on the core promise of this type of fund structure—alpha. 

According to Elliot Johnson, Chief Investment Officer of Evolve ETFs, SEED’s management style was specifically decided upon because it could be adapted to capitalize on opportunities within the changing cannabis landscape.

“We chose an active approach for the cannabis sector because it is such a news-driven, volatile industry. It’s not uncommon for the price of a cannabis stock to move by 10% or more in a single day,” said Johnson. “In those circumstances, we believe it’s particularly important to be reacting to changes in the market to ensure appropriate portfolio construction is maintained at all times.”

Active management has allowed SEED to successfully navigate changes within the cannabis industry and capitalize on new and fast-growing segments of the market. 

Johnson pointed to Canadian legalization in October 2018, as an example of active management’s edge within cannabis investing. Said Johnson, “We were well-positioned to take advantage of that rally and to take risk off the table when prices ran too far, too fast.”

What all this indicates is that, despite high investor interest, volatility is still high within the cannabis industry as a whole. Inconsistent performance has hampered individual stocks as much as entire indexes. As a result, the ability to quickly respond to industry developments and regulatory changes will likely continue to be the defining characteristic among cannabis ETFs, especially as investors continue to seek diversified exposure to the industry.

Evolve ETFs is a content partner of Benzinga