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Supply Constraints Are A Big Deal For The Marijuana ETF

Mar 26, 2019 12:58 pm
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The ETFMG Alternative Harvest ETF (NYSE:MJ) is up nearly 48 percent this year, making the fund one of the best-performing non-leveraged exchange traded funds in the United States.

One of the most cited reasons for this year's bullishness for MJ and its components is increased cannabis legalization in the U.S. and in other countries.

What To Know

While increased legalization has been a legitimate catalyst for MJ and marijuana equities, there's more to the story. Supply shortages in Canada, the largest geographic weight in MJ, could be factoring into the bull case for marijuana investments.

“Legal cannabis shortages were still a problem in Canada in early 2019, several months after the country began recreational sales to adults, says a report this morning by broker Cowen,” reports Barron's. “A survey of five provinces’ online weed availability in January shows that nearly half of all items remained out-of-stock on marijuana e-commerce sites. But in the relatively-populous Ontario, supplies were better, with 61% of listed products actually in-stock. In New Brunswick and Newfoundland & Labrador, however, out-of-stock rates increased.”

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Why It's Important

The $1.23 billion MJ holds 37 stocks and nearly 62 percent of the marijuana ETF's holdings were Canadian companies at the end of the last year, according to issuer data. That makes Canada more than double the size of the U.S. in MJ.

Against the backdrop of tight supplies, MJ's exposure to Canadian marijuana stocks is important because similar supply constraints aren't found in the major U.S. cannabis markets. As just two examples, oversupply has long been an issue in Oregon and by some accounts, California is growing so much cannabis that it could significantly damage the market.

“Vessel Logistics, a San Francisco-based cannabis distribution company, found that more than 1,142 acres of cannabis farms hold state permits,” reports The Sacramento Bee. “They can produce up to 9 million pounds of crop every year, but the permitted wholesale market can realistically support 1.8 million to 2.2 million pounds.”

What's Next

Investors mulling MJ should consider the Canadian supply issue a theme that garners more attention than oversupply in the U.S. Online sales in Canada could be another catalyst for the fund.

Canopy Growth Corp. (NYSE:CGC) and Aurora Cannabis Inc. (NYSE:ACB), which combine for over 16 percent of MJ's weight, are the dominant players in Ontario's cannabis e-commerce business.

Canopy “had the largest share of in-stock product on e-commerce shelves, with a 21% share in Ontario, while Aurora Cannabis had 12% of that province’s online market,” according to Barron's.

Investors seeking additional insight can also learn more about the fund at the upcoming 2019 SALT Conference in Las Vegas, at which ETFMG CEO Sam Masucci is scheduled as a featured speaker.

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