Market Overview

POTX: A Potent Pot ETF Debuts

POTX: A Potent Pot ETF Debuts

Cannabis investing enthusiasts now have a sixth exchange traded fund to consider following the Thursday debut of the Global X Cannabis ETF (NASDAQ: POTX).

POTX tracks the Cannabis Index, making it the third passively managed fund in the cannabis ETF space.

What Happened

Measuring the success of the U.S.-listed cannabis beyond the ETFMG Alternative Harvest ETF (NYSE: MJ), the group's largest and oldest fund, is difficult at this point because, including POTX, five of those six ETFs have come to market since April of this year.

Specific to POTX, its issuer, Global X, is not only a well-known ETF sponsor, but one that has proven adept in the field of thematic funds, amassing impressive assets under management tallies with ETFs offering exposure to an array of investment niches, such as cloud computing, fintech, social media and many more.

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Why It's Important

POTX debuts with 24 stocks on its roster and like many of its competitors, the fund is heavily exposed to Canadian cannabis companies (81.14% of the new ETF's weight).

“In October 2018, Canada achieved a milestone as the first G-7 country to fully legalize adult use of recreational cannabis,” according to Global X research. “Since then, cannabis consumption has been on the rise, with 17.5% of Canadians reporting use, up from 14% a year ago, prior to legalization. In addition, sales of various medical and non-medical forms of cannabis increased 53% in the aggregate less than a year since recreational use was first allowed.”

Well-known Canadian cannabis names in POTX include Canopy Growth (NYSE: CGC), Aurora Cannabis (NYSE: ACB) and Cronos Group (NASDAQ: CRON).

One advantage POTX has is that with an annual fee of 0.50%, or $50 on a $10,000 investment, it's the second-cheapest marijuana ETF. At 0.42% per year, only the Cambria Cannabis ETF (CBOE: TOKE) is cheaper.

What's Next

Integral to POTX's long-term fortunes and those of its passive rivals will be the ability of Canadian cannabis firms to gain footholds in the fast-growing, likely more lucrative U.S. market. California is the largest state in the union and has fully legalized marijuana, but the state's onerous tax systems has kept its cannabis black market alive and well, prompting many industry observers to cite Colorado as the template weed success in the U.S.

“Since allowing recreational retail distribution of cannabis in 2014, Colorado’s monthly sales figures offer more recent insights into the potential growth trajectory of newly legalized markets,” said Global X. “Recreational sales started at $14 million per month in 2014, growing to over $122 million by June 2019, representing a 48% compound annual growth rate (CAGR). In June 2019, Colorado reached combined monthly recreational and medical sales of $152 million, or a $1.8 billion annual revenue run rate. Total sales since legalization stand at roughly $6.8 billion.”

If the number of states, currently 11, with fully legal marijuana increases and Canadian companies prove adept at encroaching into the U.S., POTX could be a winner.

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