Where Are the Marijuana Index Funds?


Jason Mueller

April 26th, 2018

Policy


Most people are at least vaguely familiar with mutual funds: they know them as conservative investments that allow the common investor to diversify their money within the market simply by buying into the fund instead of purchasing a single security such as Treasury bonds or individual stocks.  One thing that many folks don’t know, however, is that different mutual funds are set up with different objectives and underlying investments.

An Index Fund, for example, is designed to match / track the movement of an underlying index.  For example, an S&P 500 Index Fund would be structured to provide performance that mimics the S&P 500 index as closely as possible.  Because of the structure of mutual funds, it is possible for Fund Managers to buy and sell securities that are held as the underlying value behind the mutual fund – this means that even though a mutual fund is pegged to the S&P, it doesn’t need to include underlying securities listed on the S&P, all it needs to do is accurately track the performance of the index.  This distinction is important when doing research about small volume/ narrow-based index pegged funds.

Though finding index funds pegged to the S&P, Dow Averages or even Wilshire Index are regular in the investment world, finding lesser known index funds can yield significant return if you know where to look.

Prime example of an unrealized opportunity that you’ll kick yourself over would be failing to invest in funds that track the Marijuana Index before the Federal government addresses cannabis legalization.  There is steady upward pressure from a continually growing majority of US citizens for the government to legalize cannabis, and if it happens, it stands to give the cannabis industry and market segment the boost that it has needed since the first uncertainty about the future when Jeff Sessions was made AG.

One example of an index fund that both trades electronically and is pegged to the marijuana index is the Horizons Medical Marijuana Life Sciences ETF (HMMJ).  While most of their holdings are in pot producing companies and medical dispensaries, a few familiar, blue chip names made the cut including Scott’s Miracle Grow (SMG) and GW Pharmaceuticals (GWPH).  While these big name companies provide stability to the portfolio, they also have ancillary ties to the cannabis industry.  GW develops cannabis-based and synthetic cannabinoid medication.  Scott’s Miracle Grow is a trusted name in outdoor gardening.  As the cannabis industry busts and booms, these big chip stocks are sure to move in conjunction.

Advantages of investing in an index fund versus individual stocks are bountiful, especially for the everyday investor.  First, an index fund is going to be automatically diversified by the fund manager.  A single share of a mutual fund will represent a basket of underlying securities that’s put together and by the fund manager.  Another major advantage of an index fund versus single stocks is that they are managed.  The Fund Manager not only selects the stocks and securities to be included in the underlying index fund’s basket, they can adjust or add as needed, too.  This means that your portfolio is being managed by a professional.  A third and very important advantage that index funds have over common stock is that many investment companies will offer breakpoints where the cost of investing goes down at higher dollar figures invested in the same fund family.  That means that if you find a “marijuana index fund” at an investment firm where you have other accounts, you may be entitled to a lower share price simple for having money in other accounts with the same investment firm!

Jason Mueller

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