Pros and Cons to Marijuana ETF Investing

NOVICE INVESTORS, especially ones who were unfamiliar with the rapidly growing cannabis industry, can turn to the exchange-traded funds as a way to get exposure in the industry.

In fact, investing in the marijuana business has broadened rapidly as more companies have become public and listed on exchanges in the U.S. or Canada, with several ETFs approved by the Securities and Exchange Commission.

For the past several years, investors who seek to avoid the volatility of marijuana stocks can instead allocate their money into marijuana ETFs. A couple of these ETFs include ETFMG Alternative Harvest ETF (ticker: MJ) and Horizons Marijuana Life Sciences Index ETF (HMMJ). Novice investors, especially ones who are unfamiliar with the cannabis industry, can turn to these funds as a way to get exposure in the industry.

“ETFs are great if you don’t want to babysit companies,” says Jason Spatafora, co-founder of Marijuanastocks.com and a Florida-based trader and investor.

Here are few pros and cons of investing in marijuana ETFs:

  • ETFs are for a long-term approach.
  • Marijuana ETFs are good for seasonal trades.
  • Individual pot stocks might be more lucrative.

ETFs Are For A Long-Term Approach

Investing in marijuana ETFs is one way for long-term investors to play the market because it’s an easier approach than choosing stocks, says Michael Berger, founder of Technical420, a Miami-based company that conducts research on cannabis stocks. It’s a way for an investor with a buy-and-hold strategy to withstand the volatility that comes with pot stocks.

In April, two additional marijuana ETFs began trading. AdvisorShares Pure Cannabis ETF (YOLO), with an expense ratio of 0.74%. This ETF will be actively managed and will track U.S. and Canadian companies, which are in involved in consumer products, health care, and real estate. Horizons U.S. Marijuana Index ETF (HMUS) began trading last month in Canada, and it tracks the performance of the U.S. Marijuana Company Index.

Another ETF is MJ, which went public in December 2015 and holds stocks from more than 30 marijuana companies; the fund rebalances only quarterly, with an expense ratio of 0.75%. The fund allows investors to buy calls and puts and short the ETF.

Another fund is HMMJ, which began trading in April 2017 on the Toronto Stock Exchange. The fund uses the North American Marijuana Index as its benchmark and holds a basket of North American publicly listed companies with significant business activities in the marijuana industry. The ETF has an expense ratio of 0.75%, and its top holdings include Canopy Growth (CGC), Aurora Cannabis (ACB), and GW Pharmaceuticals (GWPH).

Overall, MJ and HMMJ have produced higher returns compared to the S&P 500’s recent performance over the last two years. But losses within the fund have also been steep, depending on when an investor sold shares. HMMJ’s one-year return is 37.4%, although it’s one-month annualized return shows a -1.26% loss. The one-year annualized return for MJ is 25.19%; it also experienced a dip in its one-month cumulative return, with a -1.68% loss.

While many investors trade ETFs instead of buying and holding these funds, the downside of both of these ETFs is that these funds are not actively managed by a portfolio manager.

“These two ETFs are passive and they are too tough to invest in because you can’t take advantage of the swings in the industry,” Berger says.

Marijuana ETFs Are Good for Seasonal Trades

Investors should not be lured by the previous high returns of these ETFs because the entire marijuana industry received large gains, he says.

The ETFs are unlikely to outperform again when many cannabis companies have traded at all-time highs, Berger says.

Experts say that over the past three years, many marijuana stocks have dipped between 20% and 30% during the period between late March and early August.

“I am not a fan of the ETFs, but I like them for seasonal trades at different times of the year,” he says. “I like to buy in the summer when pot stocks tend to pull back.”

Another drawback is the lack of diversification, making the investment riskier. If a few companies, which are the bellwethers report lower earnings, it can drag down the entire ETF, Spatafora says.

“Bad earnings can wipe out your gains,” he says.

Compared with investing in individual pot stocks, having a position in the ETFs means an investor could miss out on opportunities to purchase shares when these stocks are priced lower.

“ETFs can’t get out of these investments unless you shorted them,” he says. “Investors should protect themselves from the near-term weakness.”

Investors who are savvy can take advantage of the seasonal trades, he adds.

Buying Individual Pot Stocks Might Be Better

Buying marijuana stocks means that investors can follow one company’s performance versus a basket of holdings in a fund.

“When Tilray (TLRY) was trading at $200 a share, (it) was the biggest position in the (MJ) ETF. When a stock like that craters, it drags down the whole ETF,” Spatafora says.

As a better performing alternative to an ETF, he says investors should buy five marijuana stocks and diversify by adding companies, ranging from those which are harvesting the plant to those that are involved in the biotech, branding and packaging sectors.[ 

“Understanding how they trade is half the battle. If you just rush in and buy something because you’re not patient, you’re always going to pay a higher price and have to decide whether to take a loss,” Spatafora says.

Marijuana stocks are also now receiving more coverage from analysts from financial services companies, including Roth Capital Partners and Jefferies Group. Brett Hundley and Luke Perda of Seaport Global Holdings began tracking the earnings of 12 cannabis companies in February, but do not follow marijuana ETFs.

For investors who are planning to own individual pot stocks, they should maintain a mix of marijuana stocks such as early-stage companies along with more established cannabis producers. Investors may want to include companies that operate medical clinics, conduct trials of cannabinoid products and hold data such as Canadian companies Cardiol Therapeutics (CRTPF) and WeedMD (WDDMF) and U.S.-based iAnthus Capital Holdings (ITHUF).

Berger’s advice: Until there are more marijuana ETFs, especially actively managed ones, sticking to owning individual stocks will most likely generate higher returns in an investor’s portfolio.

By Ellen Chang

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