Marijuana Index Funds: A Guide To Investing In Cannabis

Marijuana ETFs (exchange-traded funds) are a way to invest in a range of cannabis-related companies, from product conception to consumption. They are an attractive option for investors as they provide instant diversification, lowering the risk compared to investing in individual stocks. However, the industry is relatively new and volatile, with regulatory uncertainty and financing hurdles creating a challenging landscape for investors.

Despite these challenges, the legal marijuana industry is growing, with the global cannabis market projected to reach $134.4 billion by 2030, growing at a 25.3% annual rate. This has sparked interest from investors who want to get in on the ground floor of this burgeoning industry.

One of the largest and most popular marijuana ETFs is the AdvisorShares Pure US Cannabis ETF, which focuses exclusively on the US cannabis market and has assets under management of over $889 million. Other notable marijuana ETFs include the Amplify Alternative Harvest ETF, the Global X Marijuana Life Sciences Index ETF, and the Cambria Cannabis ETF.

While investing in marijuana ETFs can be risky due to the uncertain regulatory environment, it also presents a unique opportunity for investors to capitalise on the growth of this emerging industry.

Marijuana ETFs vs. stocks

There are hundreds of cannabis stocks to choose from, but many of them are risky penny stocks or stocks of companies with extremely small market capitalizations. Given the industry's youth, there's ample room for shakeouts that could significantly affect a stock's price. There will likely be many losers, and it's hard to predict the number of potential winners. The current state of the industry makes an already risky strategy of picking individual stocks even riskier.

Marijuana ETFs still come with considerable risk, but you'll at least broaden your exposure to dozens of companies. If one company in the fund fails, those losses will ideally be offset by another company's success. You could miss out on the sky-high returns of an individual breakout stock, but investing in ETFs could help you avoid significant losses in such an unproven industry.

Marijuana ETFs have their benefits, but they also have their drawbacks. For example, analyst Alan Brochstein wrote in Forbes that he didn't believe cannabis ETFs were a good buy, as they lack the growth potential of investing in large producers individually. Cannabis ETFs also sometimes include companies that are less related to cannabis, which may cause them to lag.

One of the draws of ETFs is that they provide multiple stocks under one ticker symbol, giving investors instant diversification. However, this doesn't help when an entire industry is performing poorly and many stocks have lost considerable value, as has been the case with the state-legal cannabis industry in recent years.

ETFs are a potentially safer option than stocks, but investing in the cannabis industry in general comes with considerable risk. Regulatory uncertainty, financing hurdles, and sheer unpredictability in business models and operations could significantly and quickly alter the future landscape and, in turn, the value of marijuana-related investments.

The risks of marijuana ETFs

Marijuana ETFs are risky investments due to the changing legal landscape surrounding the drug. While some US states have legalised the recreational use of marijuana, it remains illegal at the federal level. The US Drug Enforcement Administration (DEA) is currently proposing to reclassify marijuana as a less dangerous drug, which could open up new opportunities for the industry. However, this reclassification is not yet final and would not make marijuana fully legal.

The regulatory uncertainty surrounding marijuana creates challenges for marijuana ETFs in terms of growth and accessing financial services. Banks are hesitant to back ETFs that invest in companies operating in an industry that is not federally legal. This makes it difficult for marijuana ETFs to get started and access capital, which could impact their performance.

Marijuana ETFs also face competition from the illicit market, where weed can be purchased at lower prices. The industry is suffering from oversupply and a lack of access to mainstream institutional investors and lending. As a result, many investors have fled the industry, and several marijuana ETFs have shut down.

Investing in marijuana ETFs also comes with the risk of unpredictable business models and operations. The industry is still in its early stages and is subject to rapid change, making it difficult to predict the future landscape. While marijuana ETFs offer diversification across multiple companies and segments of the industry, they are highly volatile and may not be suitable for risk-averse investors.

How to invest in marijuana ETFs

Marijuana ETFs, or exchange-traded funds, are a way to invest in a range of cannabis-related companies. They allow you to invest in companies that operate in every vertical of the marijuana industry, from product conception to consumption. For example, the AdvisorShares Pure US Cannabis ETF invests in companies across the entire marijuana industry, including GW Pharmaceuticals, Cronos Group, Canopy Growth Corporation, and Aurora Cannabis.

• Understand the basics: Marijuana ETFs function similarly to traditional ETFs. They are funds that track a basket of names related to the legal cannabis industry.
• Evaluate the risks and challenges: Marijuana ETFs come with considerable risks and challenges due to the changing legal landscape surrounding marijuana. Regulatory uncertainty, financing hurdles, and unpredictable business models can significantly impact the value of marijuana stocks and ETFs.
• Assess your risk tolerance: Marijuana stocks and ETFs are highly volatile due to the industry's newness and legal challenges. Ensure you conduct thorough research before investing.
• Choose a marijuana ETF: Consider factors such as performance, fees, and the companies included in the fund. Some popular options include the AdvisorShares Pure US Cannabis ETF, Amplify Alternative Harvest ETF, and Cambria Cannabis ETF.
• Find a brokerage: You will need a brokerage account to purchase marijuana ETFs. Choose a brokerage platform that suits your needs and offers access to the ETF you want to invest in.
• Place your investment: Once you have selected a brokerage and chosen the specific marijuana ETF you want to invest in, you can place your investment through the brokerage platform.

Remember, investing in marijuana ETFs carries risks, and past performance does not guarantee future results. It is essential to do your own research and understand the legal and financial landscape surrounding the cannabis industry before investing.

Do marijuana ETFs deserve a place in your portfolio?

Marijuana ETFs have faced a challenging path to market due to the changing legal landscape surrounding cannabis. While some have failed to get off the ground, others have found success, particularly those that focus on the medical marijuana industry or the U.S. cannabis market. So, do marijuana ETFs deserve a place in your portfolio? Let's take a look at the pros and cons.

Pros

Marijuana ETFs offer investors a way to gain exposure to the burgeoning cannabis industry, which is projected to reach $134.4 billion globally by 2030. By investing in an ETF, you benefit from diversification across multiple cannabis-related companies, reducing the risk associated with investing in individual stocks. The largest marijuana ETF, AdvisorShares Pure US Cannabis ETF, provides an opportunity to invest in major U.S. cannabis companies, and there are other ETFs with a global focus, such as Amplify Alternative Harvest ETF.

Cons

The main challenge for marijuana ETFs is the regulatory uncertainty surrounding cannabis, which is still illegal at the federal level in the U.S. This has made it difficult for some ETFs to find banks willing to back them and has resulted in a tense relationship with regulators. As a result, some marijuana ETFs have failed to launch, and even those that have succeeded face an uncertain future. The volatility of the industry and the limited growth of some ETFs have made them less appealing to risk-averse investors.

Marijuana ETFs could be a worthwhile investment if you are comfortable with the risks involved and have a well-diversified portfolio. However, due to the regulatory landscape, it may be challenging to find marijuana ETFs that are able to get off the ground and achieve long-term success. Therefore, it is essential to conduct thorough research before investing in this space.

Is it safe to invest in marijuana?

Investing in marijuana carries a significant amount of risk and uncertainty. While the industry has a tremendous near-term upside, it is also far riskier than most other industries. Here are some key points to consider when assessing the safety of investing in marijuana:

Regulatory and Legal Landscape

Marijuana remains illegal under US federal law, and its classification as a Schedule I drug creates significant challenges for businesses and investors. The industry faces highly disparate sets of regulations, as individual states have their own laws regarding marijuana legalisation. While there have been legislative efforts to decriminalise or legalise marijuana at the federal level, the path towards full legalisation remains unclear.

Financial and Banking Challenges

The legal status of marijuana creates financial hurdles, as banks are often reluctant to work with businesses operating in this industry. Marijuana businesses have traditionally relied on cash, and the lack of access to traditional financial services can impact their operations and ability to secure capital.

Market Volatility and Competition

The marijuana industry is relatively new and volatile, with hundreds of companies vying for dominance in a crowded market. Stock prices can be unpredictable, and many companies may struggle to maintain operations or even shutter under market pressure. It is challenging for investors to predict which companies will succeed in the long term.

Ethical and Social Considerations

Some investors may have ethical concerns about investing in the marijuana industry, particularly those who advocate for clean living or have reservations about the potential health risks associated with cannabis use.

Diversification and Risk Mitigation

To mitigate the risks associated with investing in marijuana, investors often consider diversifying their portfolios by investing in exchange-traded funds (ETFs) or mutual funds that provide exposure to a range of cannabis-related companies. This strategy can help spread risk across multiple companies and segments of the industry.

In conclusion, investing in marijuana carries a significant level of risk due to legal uncertainties, financial challenges, market volatility, and ethical considerations. However, the potential rewards of investing in this emerging industry may outweigh the risks for some investors. It is essential to perform thorough due diligence and carefully consider your investment objectives and risk tolerance before entering this sector.

Frequently asked questions