Marijuana stocks are poised for enormous growth over the next 5 to 7 years. New Frontier Data estimates that the U.S. and Canada alone will generate around $172 billion in retail sales over the next 6 years.
As more U.S. states embrace the legalization of marijuana, both medical and recreational and cannabis comes online in more countries around the world, why not gain exposure to one of the hottest industries of the 21st century?
Quick Look: The Best Cannabis ETFs
- Featured ETF: Evolve Marijuana ETF (TSX: SEED)
- ETFMG Alternative Harvest ETF (NYSEARCA: MJ)
- Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF)
- Horizons Junior Marijuana Growers Index ETF (OTC: HZEMF)
Risks of Picking Individual Cannabis Stocks
If you decide to invest in the marijuana industry, there’s no shortage of opportunities. Dozens of cannabis companies in the U.S. have gone public. Most are listed in Canada but still have an over-the-counter (OTC) stock listed on U.S. markets.
A number of large Canadian producers, such as Aurora Cannabis Inc., Canopy Growth Corp. and Tilray Inc. have listed their stock on major U.S. stock markets.
Investors can also get exposure to the marijuana industry without actually investing in companies that work directly with cannabis, THC or CBD. These are ancillary service providers, businesses that are essential and facilitate the activity of the entire industry.
The recent legalization of hemp and CBD in the U.S. will also likely present major opportunities. NFD projects the hemp-derived CBD market to reach $1.3 billion by 2022 from $390 million in 2018. Hemp is legal on a federal level, so hemp and CBD-focused companies will be able to list on NYSE and NASDAQ.
You’ll also find that there are risks of investing in cannabis stocks. For one, many small companies are either overvalued or are, simply pump-and-dump schemes. Larger and established companies also come with their own risks.
So, how do you hedge your risks, especially if you’re not a cannabis expert or don’t have time to research every stock? Consider ETFs.
Why Invest in ETFs?
Exchange-traded funds, or ETFs, have become a popular choice among passive investors amid the stock market’s record highs the past couple of years. ETFs offer the convenience of stocks, as they can be bought through a regular brokerage and are very liquid, which allows them to be traded throughout the day.
ETFs also offer diversification and cover a variety of market indexes as well as industries and geographies. These features, as well as relatively low management fees, make ETFs attractive. The marijuana industry is still nascent, so ETFs offer well-diversified and less risky exposure to the industry than from picking individual stocks.
What are Marijuana ETFs?
The downside from the emerging nature of the cannabis industry, as well as its illegality on a federal level in the U.S., is that there are only a handful of marijuana ETFs available.
There are only some ETFs available to U.S. investors, 2 of which are based in Canada and are traded in the U.S. on the OTC market. Let’s take a closer look at each one.
ETFMG Alternative Harvest ETF (NYSEARCA: MJ)
The ETFMG Alternative Harvest ETF is the largest ETF of the 3, with over $1.0 billion in assets. The ETF replicates the performance of the Prime Alternative Harvest Index.
The fund’s portfolio includes 37 positions, including exposure to the U.S. dollar and the British pound sterling. It’s pretty diversified, as top 10 holdings amass 58% of its assets. It includes the largest names in cannabis, such as Cronos Group Inc., which is its largest position, as well as Aurora Cannabis Inc., Canopy Growth Corp. and CannTrust Holdings Inc.
Out of 37 positions in ETFMG Alternative Harvest ETF’s portfolio, only 11 are pure-play marijuana stocks. The rest of the positions include pharmaceutical companies that develop or sell cannabis-based drugs, such as GW Pharmaceuticals PLC and Cara Therapeutics Inc.
The ETF is also invested in a range of tobacco companies, including Schweitzer-Mauduit International Inc., Vector Group Ltd., Philip Morris International Inc. and British American Tobacco PLC (NYSE: BTI).
Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF)
The other 2 cannabis ETF offerings operate from Canada. One is Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF), which has a total value of $947.41 million Canadian dollars ($718.89 million).
The Horizons Marijuana Life Sciences Index ETF seeks to replicate the performance of the North American Marijuana Index, which includes a basket of life sciences stocks that operate in the marijuana industry.
This ETF includes 49 positions, but the top 10 holdings amass 76.8%. It includes major cannabis producers such as Cronos Group, Canopy Growth Corp. and Aurora Cannabis, which together represent 33.28% of the fund’s portfolio.
Most of the companies in the ETF’s portfolio are pure-play cannabis stocks, but it also includes some pharmaceutical companies.
Horizons Junior Marijuana Growers Index ETF (OTC: HZEMF)
Next, there’s the Horizons Junior Marijuana Growers Index ETF (OTC: HZEMF), which allows investors to get exposure to smaller cannabis players. It has a capitalization of CA$10.80 million and tracks the Emerging Marijuana Growers Index.
The advantage of the Horizons Junior Marijuana Growers Index ETF is that it’s focused on small-cap stocks, which are usually riskier than established companies. Bundling them in an ETF reduces their risk. It’s diversified, with 42 holdings and top 10 positions that amass 54% of the portfolio value.
The top holdings in Horizons Junior Marijuana Growers Index ETF are Harvest Health & Recreation Inc. (OTC: HRVSF), Terrascend Corp. (OTC: TRSSF), Emerald Health Therapeutics Inc. (OTC: EMHTF), Supreme Cannabis Company Inc. (OTC: SPRWF) and Liberty Health Sciences Inc. (OTC: LHSIF).
Evolve Marijuana ETF (TSE: SEED)
Lastly, Evolve Marijuana ETF looks to invest in a diversified mix of equity securities to deliver units of long-term capital appreciation for investors. Their top 10 holdings amass about 65% and include companies such as Aurora Cannabis, Aphria Inc, Canopy Growth, and Tilray.
This ETF, and their 27 holdings are catered mostly to Canadian investors, and like most cannabis ETFs, is suitable for those willing to accept a high degree of risk and who do not need a steady source of income from their investments.
Aside from marijuana ETFs, a couple of other funds also deserve to be mentioned. One is AdvisorShares Vice ETF (NASDAQ: ACT), which focuses on alcohol, tobacco, restaurants and entertainment stocks.
It also allocates 25% to cannabis-related companies such as Pyxus International Inc. (NYSE: PYX) and a small portion to alcohol and tobacco companies with exposure to cannabis, such as Constellation Brands Inc. (NYSE: STZ) and Altria Group (NYSE: MO).
Another is a mutual fund, American Growth Fund (MUTF: AMREX), which invests in growth stocks, mostly tech, such as Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN) but also has some exposure to cannabis through investments like GW Pharmaceuticals or KushCo Holdings Inc (OTC: KSHB).
Which Marijuana ETF To Pick?
The short answer is that it doesn’t matter which marijuana ETF you choose, because they all share a lot of holdings among themselves, less so the Horizons Junior Marijuana Index ETF. The cannabis ETF segment is very new and still finding footing. You have some options to choose from in case you are dead set on investing in an ETF instead of building your own portfolio.
The two largest ETFs will give you exposure to the largest cannabis producers and top pharmaceutical companies that are working with cannabinoids.
Take the time to look at not only the ETF’s track record, but its holdings, too, to make sure those holdings align with your expectations. Marijuana ETFs also branch out into other industries that have less to do with the plant.
A wise approach could involve going through the market yourself and picking a handful of companies that cover various segments within the cannabis industry and have operations in several countries (in the U.S., Canada, Europe and Latin America), as these are positioned as the best-performing markets.