Marijuana Index Etf: A Smart Investment Strategy

Marijuana ETFs are a way to invest in a range of cannabis-related companies, from those involved in product conception to those involved in consumption. The main benefit of buying marijuana ETFs is that your money is spread across a basket of stocks, lowering your risk compared to investing in only a few individual stocks. However, the industry is subject to regulatory uncertainty, financing hurdles, and unpredictable business models and operations, which can significantly impact the value of marijuana stocks and ETFs.

Marijuana ETFs function similarly to traditional ETFs, tracking a basket of names related to the legal cannabis industry. While many marijuana companies have established themselves, the regulatory framework around the product remains challenging. As a result, marijuana ETFs face challenges to growth and should be approached with caution.

Despite these challenges, the global cannabis market is projected to reach $134.4 billion by 2030, growing at a 25.3% annual rate. This, along with the increasing legalisation of cannabis worldwide, makes it an attractive investment opportunity for some.

The pros and cons of investing in marijuana ETFs

Pros

Marijuana exchange-traded funds (ETFs) give you the chance to invest in a range of cannabis-related companies. They also offer diversification, lowering the risk compared to individual stocks.

Cons

Investing in cannabis—including cannabis ETFs—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 stocks and ETFs.

Marijuana ETFs have faced challenges due to the changing legal landscape surrounding marijuana and should be approached with caution. While the industry is growing, ETFs focused on this sector face a troubled and uncertain future.

Pros:

• Diversification: Marijuana ETFs allow investors to spread their risk across multiple companies and segments of the cannabis industry, rather than concentrating their investments in any single stock. This diversification is a proven method for reducing risk in investing.
• Growth potential: The global cannabis market is projected to reach $134.4 billion by 2030, growing at a 25.3% annual rate. This provides a significant growth opportunity for investors.
• Instant diversification: Exchange-traded funds provide multiple stocks under one ticker symbol, giving investors instant diversification.

Cons:

• Regulatory uncertainty: Marijuana remains illegal at the federal level in the US, creating regulatory uncertainty for investors.
• Financing hurdles: Marijuana companies often face challenges in accessing traditional financing and banking services, which can impact their operations and growth prospects.
• Unpredictability: The cannabis industry is new and constantly evolving, making it difficult to predict the future landscape and the potential success of investments.
• Limited options: Investors interested in marijuana ETFs face somewhat limited options, as some ETFs are only listed on specific exchanges or have other restrictions.
• Volatility: Marijuana stocks and ETFs are incredibly volatile due to the new and constantly changing nature of the industry. This volatility can lead to significant price fluctuations.

How to choose the right marijuana ETF

Marijuana ETFs are a good option for investors who believe in the potential of the cannabis industry but don't want to pick individual stocks. The cannabis market is inherently risky and volatile, so ETFs can provide a more stable entry point into the sector.

• Holdings: Look under the hood of the ETF and evaluate each holding. Diversify across product types, market cap, liquidity, and trading activity. High trading activity can indicate that the assets are more likely to be liquid.
• Focus: Some ETFs focus on medical marijuana or specific products, while others invest in everything from pharmaceuticals to hemp and agriculture. Some ETFs focus exclusively on cannabis, while others include it among other products like tobacco and alcohol.
• Geography: Consider whether you want exposure to the U.S. market, the Canadian market, or a combination of both. U.S.-focused ETFs can benefit from the increasing number of states legalizing cannabis, while Canadian-focused ETFs can provide access to established companies already operating in a fully legalized market.
• Performance: While past performance doesn't guarantee future results, it can be a good indicator. Look at the fund's one-year, three-year, or five-year returns to get a sense of how it has performed over time.
• Risk: Marijuana ETFs come with considerable risk due to regulatory uncertainty, financing hurdles, and unpredictable business models. Consider your risk tolerance and whether you're comfortable with the potential volatility of the cannabis industry.
• Size and cost: Consider the size of the ETF in terms of assets under management and the expense ratio. Larger ETFs may have more established holdings, while smaller ETFs may offer lower fees.

• AdvisorShares Vice ETF (VICE)
• Cambria Cannabis ETF
• AdvisorShares Pure Cannabis ETF
• Amplify Alternative Harvest ETF (MJ)
• Amplify Seymour Cannabis ETF (CNBS)
• AdvisorShares Pure US Cannabis ETF (MSOS)

The regulatory challenges facing marijuana ETFs

Marijuana ETFs have faced a number of regulatory challenges that have hindered their growth and development. Here are some of the key challenges:

Regulatory Uncertainty

The legal status of marijuana in the United States is complex and uncertain. While some states have legalised marijuana for medical or recreational use, it remains illegal at the federal level. This creates a challenging environment for businesses operating in the industry and has led to concerns among investors. The regulatory landscape is constantly evolving, and any changes in legislation can significantly impact the value of marijuana stocks and ETFs.

Banking and Financing Hurdles

Marijuana-related businesses have faced difficulties in accessing traditional banking and financial services due to the federal illegality of the substance. They often have to operate entirely in cash, which creates logistical challenges and security risks, such as fraud, theft, and money laundering. Additionally, marijuana companies are subject to tax code 280E, which prevents them from deducting ordinary business expenses from their gross income, resulting in high tax payments.

Custodian Issues

Marijuana ETFs have faced challenges in finding custodian banks willing to hold their assets due to regulatory uncertainties. Many banks are hesitant to take on the potential legal and reputation-related risks associated with an industry that is not federally legal. This has made it difficult for some marijuana ETFs to get off the ground and has led to unconventional workarounds for those that have launched.

Volatility and Risk

The regulatory challenges and the evolving legal landscape contribute to the volatility and risk associated with marijuana ETFs. The industry is subject to constant change, and investors must closely monitor legislative developments to make informed investment decisions. Marijuana stocks and ETFs are incredibly volatile, and the limited growth of some marijuana ETFs has made them less attractive to risk-averse investors.

Competition and Overregulation

As new markets open up, competition among marijuana businesses is expected to intensify, leading to price pressures and potentially impacting profitability. Additionally, stringent state regulations can burden businesses with high compliance costs and limit their operational flexibility.

Public Perception

Despite growing acceptance, marijuana still faces negative stereotypes and concerns about its public health impact. This can influence consumer adoption in certain regions and impact the performance of marijuana ETFs.

The future of the marijuana industry in the US

The industry is projected to be worth $45.8 billion in 2025, with 743,000 jobs devoted to handling the plants. By 2030, the industry is expected to generate $71 billion in sales, and by 2032, the North American market for CBD alone is estimated to be worth $63.3 billion.

However, the industry still faces challenges. Marijuana companies struggle to access traditional banking services and capital due to the drug's illegal status under federal law. This has led to a reliance on cash, creating inconvenience and security risks for businesses. While former US Attorney General William Barr has stated he will not prosecute marijuana companies operating in states where the drug is legal, the discrepancy between state and federal law remains an issue.

There is also competition from the illicit market, where weed can be purchased at lower prices. The industry is suffering from oversupply, and there is a lack of access to mainstream institutional investors and lending.

Despite these challenges, the future looks bright for the US marijuana industry. The shift in public opinion towards acceptance, the growing number of medical uses for marijuana, and the increasing demand for cannabis products worldwide all point towards a thriving industry.

The top-performing marijuana ETFs

Marijuana ETFs provide diversification, lowering the risk of investing in individual stocks. Here is a list of the top-performing marijuana ETFs, ranked by assets under management:

• AdvisorShares Pure U.S. Cannabis ETF (MSOS): The largest marijuana ETF, with assets under management of $916 million as of May 2024. It focuses exclusively on the US cannabis market and currently owns 25 US marijuana stocks, including Green Thumb Industries, Trulieve Cannabis, Curaleaf Holdings, Verano Holdings, and Cresco Labs.
• Amplify Alternative Harvest ETF (MJ): The second-biggest cannabis ETF with assets under management of $324.2 million as of May 2024. It is globally focused and invests in companies benefiting from medicinal and recreational marijuana legalization initiatives. Its top holdings include Innovative Industrial Properties, Tilray Brands, SNDL, Cronos Group, and Canopy Growth.
• Amplify U.S. Alternative Harvest ETF (MJUS): One of the newest marijuana ETFs, launched in 2021, with assets under management of $140.4 million as of May 2024. It focuses on US cannabis companies and currently owns eight individual stocks, including Curaleaf Holdings, and swap positions in Trulieve Cannabis, Green Thumb Industries, Verano Holdings, and Cresco Labs.
• Global X Marijuana Life Sciences Index ETF (HMLSF): One of the oldest marijuana ETFs, established in 2017, but not listed on a major US stock exchange. Its top holdings include Innovative Industrial Properties, Cronos Group, Jazz Pharmaceuticals, Scotts Miracle-Gro, and Tilray Brands.
• AdvisorShares Pure Cannabis ETF (YOLO): AdvisorShares' second marijuana ETF focuses on the global cannabis market. It has assets under management of $58.2 million as of May 2024 and holds stocks from Canada, the UK, and Israel, including High Tide, Village Farms International, Cardiol Therapeutics, SNDL, and Cronos Group.
• Amplify Seymour Cannabis ETF (CNBS): Actively managed by Tim Seymour, a well-known cannabis investor. It has assets under management of $41.2 million as of May 2024 and holds stocks from US, Canadian, and Irish cannabis companies, including Innovative Industrial Properties, Tilray Brands, Trulieve Cannabis, Green Thumb Industries, and Cresco Labs.
• Cambria Cannabis ETF (TOKE): The smallest ETF on the list, with assets over $11.1 million, but also the cheapest in terms of the annual expense ratio. It was formed in 2019 and has 26 holdings, including swaps in Glass House Brands, Grown Rogue International, Green Thumb Industries, and Trulieve Cannabis, as well as shares of SNDL.

Frequently asked questions