Cannabis Etfs: Legal Investment Opportunities?

Marijuana ETFs are a growing investment opportunity, but is investing in them legal? In the US, marijuana is illegal at the federal level, but some states have legalised its recreational use, and many more have legalised it for medical purposes. This has created a complex legal landscape, with the potential for conflict between state and federal laws. However, this hasn't stopped the emergence of marijuana ETFs, which allow investors to buy into a range of cannabis-related companies. While investing in marijuana ETFs is possible, it comes with considerable risk due to the uncertain legal and regulatory environment surrounding the industry.

Marijuana ETF basics

Marijuana ETFs (exchange-traded funds) function in the same way as traditional ETFs. They are funds that track a basket of names related to the legal cannabis industry. For example, a marijuana ETF might track a portfolio of energy outfits or video game companies.

The largest marijuana ETF is AdvisorShare Pure U.S. Cannabis ETF, with assets of $889 million as of 23 August 2024. However, marijuana ETFs have faced challenges due to the changing legal landscape around marijuana and should be approached with caution. Regulation is a major concern, as banks are hesitant to back ETFs tracking companies in a business that isn't federally legal.

Marijuana ETFs offer investors diversification, lowering the risk compared to individual stocks. They allow investors 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 (cannabinoid-focused medicine)
• Cronos Group (production and distribution)
• Canopy Growth Corporation (research and product development)
• Aurora Cannabis (product development and production)

Investing in marijuana ETFs spreads your risk across multiple companies and segments of the industry, rather than concentrating it on any single stock. This strategy is known as diversification and is a proven method in investing, especially in a new and volatile sector like the cannabis industry.

The global cannabis market is projected to reach $134.4 billion by 2030, growing at a 25.3% annual rate. This presents a significant growth opportunity for investors.

Pros and cons of investing in marijuana ETFs

Pros

• Diversification: Investing in marijuana ETFs allows you to spread your risk across multiple companies and segments of the industry, rather than concentrating it on a single stock. This is a proven investment strategy, especially important in a new and volatile sector like the cannabis industry.
• Potential for high returns: If the legal marijuana industry takes off, those who invested early may benefit from high returns.
• Access to a range of companies: Marijuana ETFs allow investors to access a range of cannabis-related companies, from product conception to consumption.
• Strong performance: Some marijuana ETFs have outperformed the S&P 500 and have seen healthy trading volumes.

Cons

• Regulatory uncertainty: Marijuana ETFs face challenges due to the changing legal landscape surrounding marijuana. Banks are hesitant to back ETFs tracking companies in an industry that isn't federally legal in the US, leading to setbacks in getting started and potential difficulties in the future.
• Volatility: Marijuana stocks and ETFs are incredibly volatile due to the new and constantly changing legal landscape.
• Limited growth: Some marijuana ETFs have experienced fluctuations in price and limited growth, making them less attractive to investors.
• Risk: While ETFs are generally considered less risky than individual stocks, marijuana ETFs are still considered a risky investment due to the regulatory and financial uncertainties surrounding the industry.

Marijuana ETF trading

Marijuana ETFs (exchange-traded funds) are funds that track a basket of names related to the legal cannabis industry. They function in the same way as traditional ETFs, but focus specifically on companies involved in the cultivation, distribution, and sale of marijuana, as well as companies that research the medical uses of marijuana, such as those in the pharmaceutical and biotech industries.

While the legal cannabis industry is still in its early stages, and largely dependent on state-by-state legislation in the US, it is generating a sizable new industry. For investors, this presents a new and unique opportunity for growth.

There are several marijuana ETFs available, including:

• AdvisorShares Pure US Cannabis ETF (MSOS)
• Amplify Alternative Harvest ETF (MJ)
• Amplify U.S. Alternative Harvest ETF (MJUS)
• AdvisorShares MSOS 2x Daily ETF (MSOX)
• AdvisorShares Pure Cannabis ETF (YOLO)
• Amplify Seymour Cannabis ETF (CNBS)
• Cambria Cannabis ETF (TOKE)

These ETFs provide instant diversification, as they spread risk across multiple companies and segments of the industry. However, they also come with considerable risk due to the changing legal landscape surrounding marijuana. Regulatory uncertainty, financing hurdles, and unpredictable business operations could significantly impact the future of the industry and the value of marijuana stocks and ETFs.

For investors willing to take on the risk, marijuana ETFs offer a chance to get in on the ground floor of a burgeoning industry.

Marijuana ETF risks

Marijuana ETFs (exchange-traded funds) are a high-risk investment due to the uncertain and volatile nature of the cannabis industry. Here are some key risks to consider:

Regulatory Uncertainty

Marijuana remains illegal at the federal level in the US, classified as a Schedule I controlled substance. While some states have legalised its recreational or medicinal use, there is a grey area between state and federal laws. The US Attorney General can decide whether to enforce federal marijuana laws within states, and this stance has shifted between presidential administrations. This fluidity creates ongoing uncertainty for investors.

Banking and Financing

Although access to banking services for marijuana companies has improved in recent years, with legislation like the Secure and Fair Enforcement Banking Act, the industry still faces challenges in obtaining traditional financing. Banks are hesitant to back ETFs tracking companies in an industry that isn't federally legal, creating obstacles for investors.

Business Model and Operational Risk

The unpredictable nature of the cannabis industry extends to business models and operations. Marijuana companies, particularly smaller ones, are vulnerable to external shocks and intense competition. This can result in significant losses for investors if conditions deteriorate.

Market Volatility

The young age of the industry and the regulatory challenges it faces contribute to market volatility. Marijuana ETFs can experience fluctuations in price and limited growth, making them less attractive to risk-averse investors.

Legal Landscape

The legal landscape surrounding marijuana is subject to change, and investors must stay apprised of any developments that could impact their investments. For example, the proposal to shift marijuana from Schedule I to Schedule III could affect commercialisation and research opportunities.

International Laws

Marijuana-related activities may be prohibited or restricted by laws outside the US, creating additional complexity for investors.

Concentration Risk

Some marijuana ETFs have a high level of concentration in specific sectors or geographic regions, such as Canada. This concentration increases the risk of loss for investors, as it makes the ETF more vulnerable to economic or trade-related factors specific to that region.

In summary, while marijuana ETFs offer a diverse investment in the cannabis industry, they carry significant risks due to the regulatory, legal, and financial uncertainties surrounding the sector. Investors must carefully consider these risks and conduct thorough research before investing in marijuana ETFs.

Marijuana ETF growth opportunities

The legal cannabis industry is growing, and with it, a host of investment opportunities. Marijuana exchange-traded funds (ETFs) are one such opportunity. These funds allow investors to bet on a basket of cannabis-related companies, from product conception to consumption. While investing in marijuana ETFs comes with considerable risk due to the changing legal landscape and regulatory uncertainty, there are also potential growth opportunities for investors willing to take on the challenge.

Growth Opportunities

Diversification and Risk Reduction

One of the main benefits of investing in marijuana ETFs is diversification. By investing in an ETF, you spread your risk across multiple companies and segments of the industry, rather than concentrating it on any single stock. This is especially important in a volatile and relatively new sector like the cannabis industry.

Exposure to a Growing Industry

The global cannabis market is projected to reach $134.4 billion by 2030, growing at a compound annual growth rate of 25.3%. This tremendous growth potential offers investors a chance to get in on the ground floor of a burgeoning industry.

Top-Performing Marijuana ETFs

Some of the top-performing marijuana ETFs include the AdvisorShares Pure US Cannabis ETF, Amplify Alternative Harvest ETF, and Cambria Cannabis ETF. These ETFs have delivered strong returns and offer exposure to a diverse range of cannabis companies.

Banking and Financing Improvements

While the cannabis industry has faced challenges in accessing traditional financing and banking services, this landscape is changing. The number of depository institutions providing banking services to marijuana companies has been steadily increasing, and legislative changes like the Secure and Fair Enforcement Banking Act could further improve access to financial services for cannabis businesses.

Potential for Federal Legalization

Although marijuana remains illegal at the federal level in the US, there are signs that this could change. The US Drug Enforcement Administration is considering reclassifying marijuana as a less dangerous drug, which could open up new avenues for commercialization and access to tax benefits for cannabis companies.

Marijuana ETFs offer growth opportunities for investors willing to navigate the complex and evolving legal landscape. With the potential for federal legalization, improving banking access, and a rapidly growing industry, investors who get in early may be well-positioned to benefit from the expansion of the legal cannabis market.

Frequently asked questions