Cannabis Exchange Traded Funds (ETFs) started to become a trend in the past couple of years emerging as a possibility to easily diversify investment, providing liquidity and dividends to investors. These mutual investment funds give Latin American investors a chance to bet on an industry without having to risk large amount on money in the stock market, protecting them from market volatility.
Although the cannabis industry is growing steadily, with legal sales of nearly $15 billion globally by 2019, company shares in the sector have proven to be much more volatile than expected, especially in the last year.
In this context, cannabis ETFs emerge as a practical possibility to easily diversify investment and reduce the natural risk of the stock market.
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Cannabis ETFs as a new trend that’s attracting investors all over the world
Pure-play ETFs are the ones that focus most of their portfolio on cannabis companies, are relatively new. The first of them debuted on the New York Stock Exchange in late 2017.
Tim Seymour, who heads the Amplify Seymour Cannabis ETF, explained that the inevitability of overall industry growth, coupled with the volatility of his companies’ shares, makes cannabis the ideal industry for this type of investment.
Investing in cannabis companies requires a full-time commitment. Only in this way can one understand and keep abreast of industry developments and laws, added the investor, who is also a panelist on CNBC’s “Fast Money” program.
However, it is not only individual investors seeking to diversify their portfolios who turn to these ETFs, said Dan S. Ahren, director of AdvisorShares Pure Cannabis ETF. The biggest ETF shareholders are in fact, institutional investors.
According to Matt Markiewicz, CEO of The Cannabis ETF, a large proportion of cannabis investors tend to look for the most liquid and in-demand shares, those of vertically integrated growers. But these do not always represent the best opportunity.
“We believe that investors should be exposed to some of the subgroups of the industry, which include cultivation, retail, testing, medicine, CBD, extraction, and adjacent businesses. Investors, said Markiewicz, can benefit from the diversification, liquidity and dividends that ETFs provide.
Latin American investors focused on four major ETFs
There are numerous ETFs focused on cannabis on the stock exchanges in Canada but only four of them are the most familiar to investors in Latin America.
The Alternative Harvest ETFMG (NYSE:MJ) was the first cannabis ETF to be listed on a US stock exchange, launched in December 2017. It is a passive fund that follows the Prime Alternative Harvest Index.
This allows management costs to be kept low, but at the same time limits profit potential. According to its director, Jason Wild, MJ is the most liquid ETF in the market.
Its assets total more than $567 million, making it larger than all other cannabis ETFs combined.
MJ was designed to measure the performance of cannabis companies whose growth is associated with the progress of legalization globally.
“This approach recognizes the fact that the cannabis industry is intertwined with many other industries, and that many companies outside the cannabis ecosystem will benefit from a global movement towards legalization,” said Wild.
As a primary criterion, MJ invests in companies that generate the majority of their revenue from growing cannabis or cannabis products.
Secondly, the fund invests in cannabis companies that offer services adjacent to cultivation, and are expected to benefit from the global growth of the industry. Finally, and to a lesser extent, companies not directly related to cannabis are included, which may benefit from their growth.
The Amplify Seymour Cannabis ETF (NYSE: CNBS) debuted on the New York Stock Exchange in July 2019. It is an active ETF led by Tim Seymour, who also runs the Seymour Asset Management fund.
CNBS is an active ETF that, by internal mandate, must have at least 80% of its portfolio invested in cannabis companies. Companies that derive more than 50% of their income from the plant fit this criterion.
“Being an active ETF means that we are not tied to an index, we are free to buy and sell every day. That doesn’t mean we do. But if there are catalysts to invest, we can execute them quickly,” says Seymour. In his view, the nature of the cannabis industry today, with new companies debuting on the stock market and many others entering into merger and acquisition processes, requires an ability to adapt and act quickly to evolve with the industry.
“The top 5 or 6 open-capital cannabis companies in 2017 and 2018 are not the ones in the top today,” he added.
CNBS invests in Canadian, Australian THC companies, or companies that produce CBD, the non-psychotropic component of cannabis that is legal in the US.
ETF avoids investing in US THC companies, which, despite operating legally in their home states, remain in violation of the US federal law.
The Cannabis ETF (NYSE:THCX) was launched in July 2019.
This passive fund follows the Innovation Labs Cannabis Index, a global portfolio of stocks from companies focused on legal cannabis, hemp, and CBD products.
Matt Markiewicz, the fund’s CEO, was a director of iShares, the ETF arm of the BlackRock fund, for six years.
For a stock to enter the Innovation Labs Cannabis Index, it must be listed on the NYSE, NASDAQ, Toronto Stock Exchange (TSX), or Australian Stock Exchange (ASX); operate legally in the jurisdiction in which it resides; and have a market capitalization of at least $100 million. In addition, no position may be worth more than 8% of the total index value.
For Markiewicz, THCX is a pure-play cannabis fund that enjoys even greater purity than its counterparts, as it does not hold any alcohol or tobacco company shares.
“At the recreational level, the tobacco and alcohol industries are losing market share to cannabis. Alcohol and tobacco stocks are on the defensive, while cannabis is a growth game. A growth portfolio should never include defensive stocks,” he explains.
Seeking to reduce its exposure to the industry’s inherent volatility, THCX reviews and adapts its portfolio on a monthly basis, in contrast to other passive cannabis ETFs that do so on a quarterly basis.
AdvisorShares Pure Cannabis ETF (NYSE: YOLO) was launched in April 2019 and was the first active cannabis ETF in the United States. It is also the only ETF to include significant investments in multi-state cannabis operators in the United States.
The AdvisorShares Pure Cannabis ETF is not index-based, but selects stocks individually.
“We choose the cannabis companies that we believe have the best price appreciation opportunities,” said Dan S. Ahrens, the fund’s managing director. AdvisorShares only looks for companies whose revenue sources come from cannabis at least 50%, avoiding companies whose main income comes from tobacco, alcohol, fertilizer, or lighting for cultivation.
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