Marijuana ETFs, with all their ups and downs, are a slowly-growing alternative investment a lot of investors are looking into. Here is everything there is to know about them.
In this article:
- What Are Marijuana ETFs?
- When Was the First Marijuana ETF Introduced?
- What Are Some of the Challenges Faced by These ETFs?
- Why Should One Invest In Marijuana ETFs?
- How Can Marijuana ETFs Protect Investors from the Complexities of Investing in Marijuana?
- How Does One Invest In Marijuana ETFs?
- Who Should Invest In Marijuana ETFs?
All You Need To Know About Marijuana ETFs
What Are Marijuana ETFs?
Marijuana ETFs, otherwise known as Marijuana Exchange Traded Funds, are industry-organized ETFs that mainly center around the cannabis industry. Also know as “weed ETF” or “cannabis ETFs,” it tracks a basket of various businesses related to the legal cannabis industry.
Most funds, however, mainly invest in research, pharmaceuticals, and recreational growers. There are also those that invest in retail, though it remains a relatively small section of the cannabis industry.
When Was the First Marijuana ETF Introduced?
Two years ago, Horizons ETFs introduced the Horizons Marijuana Life Sciences ETF — the world’s first marijuana ETF.
The ETF started trading in the Toronto Stock Exchange on April 5, 2017. It tracked the North American Medical Marijuana Index’s performance.
Horizons ETFs developed the fund with a specific eye towards the medical marijuana industry. As of March 31, 2019, it holds more than 57 pot stocks with different weightings and owns over CA$800 million in net assets.
This means that an investor can easily gain diversification within the marijuana industry for a very low net expense ratio of 0.75% per year. More importantly, this means that an investment of only $10,000 has more than doubled over the past two years.
What Are Some of the Challenges Faced by These ETFs?
Despite its success, marijuana ETFs have faced a number of challenges before they even started.
One of the biggest is the fact that banks in the US act as custodians for ETF assets. These financial institutions are the ones that actually hold the underlying securities.
Unfortunately, regulatory uncertainties force banks to remain unwilling to hold these securities. They are hesitant to back ETFs that track companies in businesses that aren’t legal on a federal level yet.
Why Should One Invest In Marijuana ETFs?
Rapid Industry Growth
The marijuana industry has boomed over the past few years. Companies that focus on cannabis have earned billions of dollars in value in the few short years since the liberalization movement truly began.
At present, 33 states and the District of Columbia have already legalized medical marijuana for use and supply, while 10 states allow it for recreational use. The industry is slated to have a $77 billion economic impact in the country by 2022.
Studies show that the US has also seen a decline in alcohol consumption and a rise in cannabis consumption, which is why a number of alcohol companies are also investing in marijuana.
Growing Interest in Medical Marijuana
How Can Marijuana ETFs Protect Investors from the Complexities of Investing in Marijuana?
There are a few specific features unique to the cannabis industry that makes it a complex investment. This is why an ETF’s risk mitigation is important when investing in marijuana.
What is Risk Mitigation? Also known as “risk management,” it’s the process of identifying, analyzing, and preparing for uncertainties in making investment decisions. It’s when investors quantify the potential losses one could suffer before taking the necessary steps to avoid them given the investor’s risk profile and objectives for investing.
Diversifying one’s investments protects the investor from events such as the government shutting down a certain grower or a sudden change in a particular state’s laws. ETFs open up possibilities for such diversification since buying up even one share of an ETF allows the investor to enjoy the growth of all stocks in that fund. This is beneficial for two reasons — it’s cheaper than buying individual stocks of those companies and protects the investor from incurring huge losses when their stocks perform poorly.
Having a diverse, substance-oriented fund, on the other hand, does more to mitigate risks that are inherent to any single-industry investment, particularly those involved in marijuana.
How Does One Invest In Marijuana ETFs?
Horizons Marijuana Life Sciences Index ETF
Horizons’ marijuana ETF, while one of the oldest and most popular marijuana ETFs, is listed only on the Toronto Exchange. US residents who wish to invest in this fund may do so, provided that their broker has facilities to execute orders on the Toronto Stock Exchange. Note though that investors who aren’t Canadian residents aren’t allowed to own a majority share of the ETF.
Horizons US Marijuana Index ETF
Earlier in 2019, Horizons also introduced the first US-focused marijuana ETF called the Horizons US Marijuana Index ETF.
Interested investors in the US would have to work with services that allow access to Canadian markets.
AdvisorShares Vice ETF and ETFMG Alternative Harvest ETF
Both offer a more straightforward process for US residents. Investors can easily access these ETFs through a broker.
Who Should Invest In Marijuana ETFs?
Marijuana ETFs are primarily for more aggressive investors.
The cannabis market is a high-risk, high-reward investment. It has grown in recent years because of a combination of sheer enthusiasm, anticipated profits, and of course, actual value.
A lot of investors got into the market looking to get rich quick, while some are simply enthusiastic about its legalization. This high degree of emotional investing with investors who move on whims makes the market less predictable. In fact, there are individual stocks that have swung by up to 26% in a single day’s trading.
A lot of capital has poured into the cannabis market in a very short amount of time. This makes it a recipe for significant short-term market corrections and reinvestment.
Investors in marijuana ETFs also need to take note the marijuana is not yet legal in the US on a federal level.
A lot of states have already decriminalized marijuana for recreational purposes and even more for medicinal purposes. However, the federal government still bans its possession and use.
Reports show that federal marijuana legalization is close, which, if passed, would get rid of complexities connected with its legality. However, at present, one should take note of the downsides this issue may entail.
Investing in a marijuana ETF is a high-risk, high-reward move that is slowly growing in popularity over the past few years. To make the most of the investment, it is important to read and understand all there is to know about it before an investor gets into it.
Do you have other questions about marijuana ETFs? Ask us in the comments section below!
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