How to Invest in the First Cannabis ETF
April 17th, 2017
News, Top News
The legal cannabis market is booming. According to analysts at ArcView, marijuana sales reached $6.9 billion in 2016 and are anticipated to reach nearly $50 billion within the next ten years. With this meteoric growth, investors are chomping at the bit to get in while the getting’s good; however, this is easier said than done due to the fact that cannabis remains illegal at the federal level.
For those looking to make a bit of a safer bet in the marijuana business, a new option has emerged. The first-ever medical marijuana exchange-traded fund (ETF) debuted last week on the Toronto Stock Exchange. When purchasing shares in an ETF, investors buy shares of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate its performance.
The Horizons Medical Marijuana Life Sciences ETF (TSE: HMMJ) currently holds 14 stocks in its basket:
- Canopy Growth Corp. (OTC:TWMJF): 9.95%
- Scotts Miracle-Gro (NYSE:SMG): 9.95%
- INSYS Therapeutics (NASDAQ:INSY): 9.95%
- Aurora Cannabis: 9.95%
- Aphria (OTC:APHQF)9.95%
- GW Pharmaceuticals (NASDAQ:GWPH): 9.89%
- Zynerba Pharmaceuticals (NASDAQ:ZYNE): 8.45%
- Cronos Group: 8.02%
- Cannimed Therapeutics: 5.56%
- Organigram Holdings: 5.38%
- Supreme Pharmaceuticals: 4.70%
- Emblem Corp.: 3.79%
- Emerald Health Therapeutics: 2.31%
- ICC International Cannabis: 2.10%
While the introduction of the ETF is indeed exciting, it isn’t necessarily a slam-dunk for investors. Not all of the companies included are directly related to cannabis, making the 14 holdings a bit of a stretch. Only three of the firms, Canopy Growth, Aurora Cannabis, and Aphria, actually produce cannabis products. Biotech companies INSYS, Zynerba, and GW Pharmaceuticals, are focused on developing therapies based on cannabinoids.
“Several of the selections are odd,” said Alan Brochstein of 420 Investor in an interview with CNBC. “INSY, which is under heavy scrutiny from the government for its alleged marketing practices and is also restating its financials, and ZYNE are biotech companies engaged in the development of drugs derived synthetically and not from botanical cannabis. Rather than being ‘medical marijuana’ companies, their success may come at the detriment of the medical cannabis industry.”
To Buy or Not to Buy
Despite the fact that not all of the holdings in the first medical marijuana ETF are cannabis related, it’s not necessarily a bad investment. Canada is gearing up to legalize pot in July of 2018, which will certainly bode well for the majority of the companies in this ETF. Additionally, GW Pharmaceuticals’ Epidiolex met its primary endpoint in two separate phase 3 trials for two types of childhood-onset epilepsy. If approved by the FDA, Epidiolex has a shot, along with label expansion, at reaching $1 billion or more in annual peak sales by 2020.
Steve Hawkins, president and co-CEO of Toronto’s Horizons ETF states that “investing in this industry is a high-risk, high-reward proposition. While companies are maturing, the sector is at the whim of governments and it’s still unclear what rules and regulations will be placed around the sale of pot.” Due to this, many analysts believe that this EFT may be better for investors who want to put smaller amounts of money into the sector and take a “wait and see” approach.
Investing in the booming legal cannabis market seems like a no-brainer to many people but it’s important to tread lightly. Buying into a medical marijuana ETF offers less risk than a traditional pot stock, but the risk still remains, mainly due to the fact that cannabis remains a schedule 1 narcotic. However, industry insiders believe that it will only be a matter of time before the legal marijuana market is worth tens of billions of dollars – so right now could be the best time to get in.
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