In the ever-evolving world of investment, cannabis exchange-traded funds (ETFs) have found themselves in a precarious position in 2023.
Amid a backdrop of struggling cannabis stocks and changing market dynamics, industry experts are raising concerns about the efficacy of certain cannabis-focused ETFs, urging investors to approach the sector with caution.
Want to dive deep into the world of investment with the expertise of Tim Seymour, founder and chief investment officer of Seymour Asset Management (SAM) and Trader on CNBC’s ‘Fast Money’? Seymour will share his insights as a featured speaker at the upcoming Benzinga Cannabis Capital Conference in Chicago on September 27-28.
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Related Content: CNBC's Tim Seymour Says Cannabis Investors May Find Positive Catalysts In Unexpected Places
Cannabis ETFs Under Fire: Concentration Risks & Quest For Diversification
One notable critic of cannabis ETFs is Alan Brochstein, CFA, and founder of New Cannabis Ventures and 420 Investor. Brochstein has been vocal about his reservations, particularly focusing on the performance of AdvisorShares Pure US Cannabis ETF MSOS, which currently holds over $300 million in assets.
Brochstein points out that MSOS faces a significant challenge: lack of diversification. "It is poorly diversified, with over 47% in two names, GTI and Curaleaf," he asserts. He further highlights that the ETF's top 6 holdings make up approximately 87% of its portfolio, a disproportionately high concentration compared to their economic contribution and market capitalization.
Brochstein's concerns extend to potential redemptions triggering sell-offs in the largest holdings, particularly Green Thumb Industries Inc GTBIF and Curaleaf Holdings Inc CURLF CURA.
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While MSOs aren't the only target of Brochstein's criticism, he suggests that Amplify Seymour Cannabis ETF CNBS could be a more favorable option despite its shortcomings. CNBS, with a comparatively modest $24 million in assets, distinguishes itself from MSOS with a less concentrated portfolio. However, even CNBS isn't spared from Brochstein's scrutiny. He notes that its top two holdings, Curaleaf and Tilray Brands Inc TLRY, don't meet his criteria for current investment.
Another player in the cannabis ETF space, ETFMG Alternative Harvest ETF MJ, has faced significant challenges in 2023, as it has been one of the hardest-hit funds in the sector. With approximately $200 million in assets, MJ's selection of securities has raised eyebrows.
Brochstein points out that a notable portion of the ETF (12%) is invested in two large Canadian LPs that he finds worrisome: Canopy Growth Corp. WEED CGC and Tilray. Moreover, around 47% of MJ's portfolio is invested in its own fund, ETFMG Alternative Harvest ETF (MJUS), which, in turn, has a significant portion (26%) allocated to Curaleaf and GTI.
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Brochstein says the current market climate is best suited for long-term investors, cautioning against relying on ETFs to navigate the sector. Instead, he advises investors to steer clear of the fees associated with ETFs and explore options for building diversified portfolios or targeting specific stocks.
From ETF Woes to Declining Indices, Navigating the Green Gold's Uncertain Terrain
Interestingly, Brochstein's skepticism about cannabis ETFs aligns with recent developments in index tracking. Two cannabis-related indices tracking businesses on North America's largest stock exchanges have been discontinued.
According to MJBiz Daily, the S&P/TSX Canada Cannabis Index, launched in early 2020, and the S&P/MX International Cannabis Index, launched in late 2019, were both decommissioned due to declining investor interest and substantial losses incurred by the companies in the sector.
Related Content: Cannabis Giant Canopy Growth Removed From Market Benchmark S&P/TSX Composite Index
The challenges faced by cannabis ETFs and related indices reflect the broader struggles within the cannabis industry. Large Canadian cannabis companies, such as Canopy Growth and Tilray, have struggled to turn a profit due to factors like overproduction and regulatory hurdles. International legalization efforts have faced setbacks in countries like Mexico, New Zealand, Germany, and Colombia, dampening investor enthusiasm.
The closures of cannabis-related mutual funds and ETFs, including the AdvisorShares Poseidon Dynamic Cannabis ETF PSDN, further emphasize the headwinds confronting the industry. Falling wholesale prices and the slow pace of federal reform in the U.S have contributed to the difficult landscape for cannabis investments.
In this evolving environment, a cautious and informed approach is paramount for investors seeking to navigate the complex world of cannabis investments. The 17th edition of the Benzinga Cannabis Capital Conference is primed to guide you through. Join us in Chicago on September 27 and 28. All information is available on bzcannabis.com
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The Benzinga Cannabis Capital Conference is coming to Florida
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