A billion dollars has already been invested in the 6 quoted Exchange Traded Funds which hold shares in cannabis companies, reports the FT. These companies have been listed in past 6 months, and this compares to only $700m in Canadian ETFs which have been around a year.
More marijuana ETFs are now rushing to list on US exchanges. Dave Nadig, managing director of ETF.com, says: “It feels like a greenfield opportunity, much like the dotcom stocks in the early 1990s. Investors feel like the Amazon of cannabis is going to come from somewhere.”
Provided that marijuana exchange traded funds can show an independent legal opinion that no holdings violate federal law, they can now list in the US, according to the SEC. Some are passive index-tracking funds, with the look and feel of an ETF; others have opted for active stock picking by industry gurus in an approach more characteristic of mutual funds.
Best Marijuana ETFs to Consider:
Cambria Cannabis ETF (TOKE)
Expense Ratio: 0.42%, or $42 annually per $10,000 invested
The Cambria Cannabis ETF (CBOE:TOKE) has a 0.42% annual fee which makes it the cheapest marijuana ETF on the market today. TOKE is actively managed, giving the management team at Cambria some leeway in terms of avoiding the worst marijuana stocks, hunting for value and maybe owning some U.S. cannabis names at some point.
No, those traits have not made TOKE immune to the tumble in cannabis equities since the fund came to market as highlighted by its nearly 31% slide since its late July debut.
TOKE “will target investing in approximately 20 to 50 of the top companies with exposure to the broad cannabis industry based on Cambria’s determination as to their exposure to the industry,” according to Cambria.
TOKE could also be the marijuana ETF for investors looking for exposure to smaller stocks because the managers say they will explicitly target mid-, small- and even micro-cap names.
The Cannabis ETF (THCX)
Expense Ratio: 0.70%
Cannabis ETF (NYSEARCA:THCX) debuted in July and was the third marijuana ETF to list in the U.S.
THCX holds 37 stocks, many of which dwell at the smaller end of small-cap territory as highlighted by a median market value of $372.4 million. Its top 10 holdings combine for about 61% of its weight and include familiar names such as Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC) and HEXO Corp (NYSE:HEXO).
THCX tracks the Innovation Labs Cannabis Index, meaning the fund is passively managed, but it does rebalance on a monthly balance, which is frequently compared to traditional index funds. As such, some of the components in this marijuana ETF are only found in this fund, not competing ETFs.
Global X Cannabis ETF (POTX)
Expense Ratio: 0.50%
Just a month old, the Global X Cannabis ETF (NASDAQ:POTX) is the newest addition the U.S. marijuana ETF fray. Its timing has been bad and the jury is still out on the fund but if there is a recovery in stocks which have fallen up to 50% this year, prompting some to compare marijuana investing to bitcoin, then POTX will benefit. And those sentiments are applicable to practically all of the marijuana ETFs that have debuted this year. POTX tracks the Cannabis Index.
One bright spot with POTX is that, depending on what valuation metrics are used in evaluating the new marijuana ETF, the fund is attractively valued. For example, the fund has a price-to-sales-growth ratio of 0.26x, below the 0.32x found on the S&P 500.
As is the case with its marijuana ETF brethren, POTX is levered to market growth and favorable legislation trends.
In 2019, global sales of legal cannabis are expected to reach $14.9 billion, rising 36% year-over-year, but still representing less than 9% of the total market.
Most of the funds have things in common: they buy companies at every point in the value chain from marijuana farmers, to cannabinoid biotechs, to agriculture real estate investment trusts. They also focus on Canadian companies because of Canada’s more liberal drug laws, and on the healthcare sector.
“We think it is likely that the majority of households will have some type of cannabis or hemp product in the near future; whether it’s a lotion, an infused beverage or hemp-based packaging,” says Christian Magoon, chief executive of Amplify ETFs, a marijuana ETF issuer.
“There are a variety of ways this industry can grow. At this stage, 70 per cent of industry revenue comes from medical use but that’s due to recreational use not being fully legalised.”
The sheer speed of listings is due to issuers’ panicked belief that there is room for only a few winners, something that has been true for other niche ETFs. In recent years, funds targeting boutique industries such as video games, robotics and cyber security have listed. In each case, the first products to market have been the most successful at bagging investor money.
“Early mover advantage is substantial in the ETF industry due to the liquidity snowball that follows,” says Bernie Thurston, chief executive of Ultumus, an ETF data provider.
“ETFs that list earlier get traded more, which helps tighten spreads,” Mr Thurston explains. “Tight spreads then bring in tactical traders, which tightens them even further.
Unrelenting price competition has driven fees on ETFs that track popular indices into the low single digits. This has forced smaller issuers into niches with higher margins.
“I think it will grow to be a $5bn-$10bn category over the next three years,” says Mr Magoon. “But for it to really grow, legalisation will need to continue in the US and around the world.”