Invest In Etf Mj: A Guide To Getting Started

Marijuana stocks are an increasingly popular investment choice, with the global cannabis market projected to grow to $70.6 billion by 2028, and $102.2 billion by 2030. However, investing in marijuana stocks comes with unique risks, and investors should be cautious. One way to invest in the marijuana industry is through the ETFMG Alternative Harvest ETF (MJ), which provides cannabis stock diversification and enables investors to take a long-term view on the industry's growth. Before investing in MJ, it is important to understand the different types of marijuana products, companies, and the risks associated with the industry. Investors should also monitor industry changes due to the dynamic legal and political landscape surrounding marijuana.

Understand the different types of marijuana products

Marijuana ETFs allow investors to invest in companies that operate in every vertical of the marijuana industry, from product conception to consumption. The industry is still in its infancy, even in Canada, and it is almost non-existent globally.

Medical Marijuana

The use of marijuana for medicinal purposes is becoming more widely accepted. Medical cannabis is now legal in 33 US states. Marijuana has been shown to be effective in treating pain, anxiety, and other conditions. GW Pharmaceuticals, for example, produces Sativex, a drug used to treat spasms in multiple sclerosis patients. Last year, the company obtained regulatory approval for its CBD drug Epidiolex, which is used to treat epilepsy.

Recreational Marijuana

Recreational marijuana is legal in 11 US states, meaning individuals require no prescription to use it in these jurisdictions. The number of states that have legalised it has been increasing as both recreational and medicinal use becomes more widely accepted.

CBD

CBD, or cannabidiol, is the second most important chemical in marijuana after THC. It is especially popular among consumers seeking relief from physical pain. Hemp and hemp-derived CBD were legalised in the US in 2018, and farmers can now apply for federal hemp cultivation permits. Hemp production and CBD products are likely to be growth areas in the US in the coming years.

Ancillary Products and Services

Companies that provide ancillary products and services, such as Scotts Miracle-Gro, which is known for its fertiliser products, are also part of the marijuana industry.

Know the different types of marijuana companies

The cannabis industry is a rapidly growing market, with plenty of opportunities for investors and entrepreneurs. There are two main types of cannabis businesses: cultivators and dispensaries. However, there are several other types of companies operating in the industry, and these can be broadly categorized into plant-touching businesses and ancillary businesses.

Plant-touching businesses

Plant-touching businesses are companies that handle cannabis directly and are involved in the growing, processing, and distribution of cannabis. They are subject to strict regulations and licensing processes. Here are some examples of plant-touching businesses:

• Breeders: Focused on the proliferation of existing cannabis strains and developing new strains through selective breeding. They develop the seeds that cultivators use and identify and propagate the highest-quality genetics for future plant generations.
• Cultivators: Manage large-scale growing facilities, which are generally indoor operations in warehouses. They employ various cultivation methods to grow healthy, high-quality cannabis plants.
• Manufacturers: Processors or extractors are responsible for converting raw plant materials into finished products such as concentrated extracts, edibles, and topicals.
• Dispensaries: These are the distribution hubs of the cannabis industry, operating like retail stores. They typically maintain a knowledgeable staff to guide patients and consumers in their purchases.
• Transportation and logistics providers: These companies bring harvested cannabis and finished products from point A to point B. This includes direct-to-consumer delivery services, which are legal in certain states.

Ancillary businesses

Ancillary cannabis businesses support plant-touching businesses but are not directly involved in breeding, growing, refining, or distributing cannabis products. They include:

• Professional services: Lawyers, business accountants, and digital marketers are crucial for cannabis businesses due to the complex and varied regulatory environment.
• Packaging: Businesses that produce packaging must consider regulatory compliance, shelf appeal, and branding. In many states, colourful packaging or certain branding approaches are illegal.
• Equipment: Plant-touching businesses require various types of equipment, such as large machines used by manufacturers to extract compounds from harvested cannabis flowers.
• Construction: There is a demand for contractors who can build cultivation facilities and dispensaries according to strict state laws and regulations.
• Security: The cannabis industry relies on security for regulatory compliance and practical reasons. Regulators often require specific areas to be monitored by security cameras, and certain lighting systems may also be required.
• Investment: Due to the challenges of traditional financing options, private financiers such as venture capitalists and angel investors have entered the industry to provide funding for cannabis businesses.

While plant-touching businesses are heavily regulated and require licenses to operate, ancillary businesses often offer a lower barrier to entry and avoid some of the stricter policies.

Understand the risks of investing in the marijuana industry

The marijuana industry is still in its infancy, even in countries like Canada, where it is legal for medical and recreational use. The industry is almost non-existent globally, and investing in it comes with a unique set of risks. Here are some of the key risks to consider:

Legislative and Political Risk: Marijuana remains illegal at the federal level in the US, and its legal status varies across different states and countries. Political opinion on cannabis can shift rapidly, and the industry's growth is heavily dependent on legislation. For example, the US federal government's recent shift towards a more anti-cannabis stance could negatively impact the industry.

Business Risk: Marijuana companies, particularly in the US, face significant challenges in accessing basic financial services and opening bank accounts. This makes it difficult for them to secure funding and increases their reliance on cash, posing accounting and liability risks. Additionally, US-based cannabis companies are subject to high tax rates and may struggle to turn a profit.

Valuation and Demand Risk: The young age of many marijuana companies makes it challenging to determine appropriate valuations. There is a risk that excitement about the industry's growth potential could lead to inflated valuations, setting the market up for a correction. As more companies enter the market, there is also a risk of supply outpacing demand, especially if high excise taxes are applied, reducing consumer demand.

Volatility Risk: Marijuana stock prices tend to be highly volatile and subject to wild swings in short periods. This makes them risky investments for those with short investment horizons. However, for long-term investors, the potential for significant growth in the industry may outweigh the short-term volatility.

Security and Data Breach Risk: The cannabis industry's early growth stage makes it a prime target for hacking attempts. The sensitive nature of the data involved, including healthcare information, further increases the potential liability for cannabis companies in the event of a data breach.

Theft Risk: As many cannabis companies operate primarily in cash due to limited access to banking services, they become attractive targets for thieves. This not only poses a security risk but also adds to the companies' expenses, making profitability even more challenging to achieve.

Know what to look for in a top marijuana stock

Marijuana stocks have been through a lot over the years, but with US cannabis sales on the rise, they could be set for a resurgence. The industry has faced issues such as inflation, overproduction, lack of capital, job losses and falling stock prices, but there are signs of a turnaround.

The legalisation of marijuana for recreational use in Ohio in November 2023 and its appearance on ballots in several other states in November 2024 are positive signs for the industry. Estimates suggest that legal cannabis sales could reach $31.4 billion in 2024, up 9.1% from 2023.

The industry is also awaiting the outcome of a Drug Enforcement Administration (DEA) hearing to consider reclassifying cannabis as a less restrictive drug. This would remove a huge tax burden from marijuana companies, which currently face far higher taxes than federally-legal industries.

So, what should you look for in a top marijuana stock?

Vertical integration

Vertical integration means that a company sells marijuana products that it cultivates, processes and manufactures itself, rather than buying weed wholesale to mark up and sell in dispensaries. This gives the company more control over how its products are grown and made, and it doesn't have to pay a premium to buy marijuana from elsewhere. It also creates operational efficiencies. Examples of vertically integrated companies include Ascend Wellness Holdings, Curaleaf Holdings, Trulieve Cannabis, Green Thumb Industries, Cresco Labs and TerrAscend.

Sales and income

Of course, sales and income are key metrics when assessing any company. Curaleaf Holdings reported sales of $342.3 million in its most recent quarter, the highest of any multi-state operator (MSO). Trulieve Cannabis reported $303.4 million in quarterly sales, representing 8% year-on-year growth. Green Thumb Industries is one of the few cannabis companies that has been consistently profitable, reporting $280.1 million in sales and $54 million in adjusted operating income for the most recent quarter.

Expansion and acquisitions

Look for companies that are expanding their operations organically and through acquisitions. Cresco Labs, for example, added 16 stores across Florida and Pennsylvania in 2023 and is now focusing its efforts on Ohio. Curaleaf Holdings cut 10% of its payroll and closed facilities in Oregon, California and Colorado in 2023 to focus on its strongest markets, a strategy that appears to be paying off, with the company reporting 2% revenue growth to $342 million in the second quarter of 2024.

Dividends

For investors seeking dividend income, Innovative Industrial Properties (IIPR) is a real estate investment trust (REIT) that invests in greenhouses and industrial facilities for the medical cannabis industry. The company has raised its quarterly dividend for seven straight years, and it currently yields 6.0%.

Analyst ratings

Analyst ratings can provide a useful indication of a company's prospects, although they should be treated with caution as they are only opinions. Cresco Labs is one of Wall Street's favourite marijuana stocks, with six Strong Buy ratings and two Buy ratings from analysts. However, Wall Street is more cautious about Innovative Industrial Properties, with a consensus Hold rating.

Exchange-traded funds (ETFs)

If you don't want to invest in individual marijuana stocks, you could consider an ETF such as the ETFMG Alternative Harvest ETF (MJ), which tracks the Prime Alternative Harvest Index and seeks to provide investment results that correspond to the performance of cannabis companies. Another option is the AdvisorShares Pure US Cannabis ETF (MSOS), which holds several MSOs, including Curaleaf and Cresco Labs.

In summary, while the marijuana industry has faced challenges, there are signs that it could be set for growth. When looking for top marijuana stocks, consider companies with vertical integration, strong sales and income, expansion plans, dividend payments and positive analyst ratings. Alternatively, you could gain exposure to the industry through a marijuana-focused ETF.

Evaluate the top cannabis stocks and ETFs

Cannabis stocks and ETFs have been performing poorly in recent years, but news that cannabis may be reclassified as a less dangerous drug has given battered funds new hope. The U.S. Drug Enforcement Administration (DEA) is moving to "reschedule" marijuana as a less dangerous drug, which may breathe new life into cannabis stocks. If this happens, cannabis companies may be able to access tax deductions and credits that are currently only available to federally legal businesses.

However, rescheduling does not make marijuana fully legal, and the industry is suffering from several challenges, including oversupply, lack of access to mainstream institutional investors and lending, and competition from the illicit market.

ETFMG Alternative Harvest ETF (MJ)

MJ is the first exchange-traded fund to focus on the global cannabis industry and tracks the Prime Alternative Harvest Index, which includes companies that grow, market, and sell cannabis products for medicinal and recreational use. The fund is dominated by Canadian cannabis companies. Its top holdings include the ETFMG U.S. Alternative Harvest ETF (MJUS), which owns cannabis stocks; SNDL Inc. (SNDL), a Canadian company that distributes and sells cannabis products; and Canopy Growth Corp. (WEED), a Canadian company that sells recreational and medicinal products.

AdvisorShares Pure US Cannabis ETF (MSOS)

AdvisorShares Pure US Cannabis ETF is an actively managed fund that focuses on U.S. cannabis and cannabis-related companies, including multi-state operators (MSOs) involved in diverse parts of the industry. The fund seeks long-term capital appreciation, and its investments may include real estate investment trusts (REITs), healthcare, hydroponics, and pharmaceuticals. Its top three holdings are Green Thumb Industries Inc. (GBTIF), Curaleaf Holdings Inc. (CURLF), and Trulieve Cannabis Corp. (TCNNF).

ETFMG U.S. Alternative Harvest ETF (MJUS)

ETFMG U.S. Alternative Harvest ETF is an actively managed fund that provides exposure to companies directly involved in the production of cannabis-related products in the U.S. Companies selected for the fund must derive at least 50% of their net revenue from the cannabis business. Its top three holdings are Innovative Industrial Properties Inc. (IIPR), a REIT focused on the cannabis industry, as well as Curaleaf Holdings Inc. and Green Thumb Industries Inc.

Amplify Alternative Harvest ETF (MJ)

Amplify is the second-biggest cannabis ETF based on assets under management. It is globally focused and is passively managed against the Prime Alternative Harvest Index, which tracks companies benefiting from medicinal and recreational marijuana legalization initiatives. Its assets under management recently stood at $324.2 million, and its shares have gained 27% year-to-date as of May 8, 2024.

Amplify U.S. Alternative Harvest ETF (MJUS)

This actively managed cannabis ETF invests at least 80% of its assets in securities of companies that derive at least 50% of their net revenue from the cannabis business in the U.S. Its net assets recently stood at $140.4 million, and it has gained 23.6% so far this year as of May 8, 2024.

AdvisorShares MSOS 2x Daily ETF (MSOX)

This fund, which is the fourth-largest cannabis ETF, uses leverage to magnify the volatility of its holdings, making both up and down moves bigger. It offers these magnified returns by investing in swap agreements on AdvisorShares Pure US Cannabis ETF, allowing investors to gain more exposure to cannabis holdings for less cash. Its assets under management recently stood at $129.7 million, and it has gained 25.7% this year as of May 8, 2024.

AdvisorShares Pure Cannabis ETF (YOLO)

Actively managed YOLO has holdings from Canada, the U.K., and Israel. It holds some stocks outright but also uses swaps, and it holds part of its allocation in MSOS, which is focused on the U.S. Its assets under management recently stood at $58.2 million, and it has gained 31.5% this year as of May 8, 2024.

Amplify Seymour Cannabis ETF (CNBS)

Like MSOS, actively managed CNBS uses swaps to circumvent restrictions against ETFs holding U.S. plant-touching marijuana stocks. The fund invests at least 80% in stocks of companies that derive at least half of their revenue from cannabis or hemp. Its assets under management recently stood at $41.2 million, and it has gained 25.1% so far this year as of May 8, 2024.

Cambria Cannabis ETF (TOKE)

This ETF is the smallest on this list in terms of assets, at a little over $11.1 million, and it's also the cheapest one. It is a global, all-cap ETF that targets about 20 to 50 of the top cannabis companies around the world. It has gained 9.9% in 2024 as of May 8, after spending much of the first quarter in the red. It has an expense ratio of 0.42%.

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