Mj Etf: Worth The Investment Risk?

Marijuana ETFs have had a rough time, but news that cannabis may be reclassified as a less dangerous drug has given these battered funds new hope. The ETFMG Alternative Harvest ETF (NYSEARCA: MJ) is a marijuana-themed exchange-traded fund (ETF) that has over $1 billion in assets under management. It provides cannabis stocks diversification, but investors should be ready to stomach short-term volatility. The ETF's expense ratio is 0.75% per year or $75 annually per $10,000 invested. It currently pays dividends with a yield of 2.43% and has become one of the most popular funds among millennial investors.

MJ ETF's high expense ratio

The MJ ETF's expense ratio is 0.75% per year, or $75 annually per $10,000 invested. While this is relatively high compared to other ETFs, it is worth noting that MJ is still in its infancy and provides exposure to a growth industry that is expected to reach tens of billions globally in the next decade.

The expense ratio of an ETF covers the management and other costs of running the fund. The higher the expense ratio, the higher the fees investors will pay. For example, the AdvisorShares MSOS 2x Daily ETF (MSOX), which uses leverage to magnify the volatility of its holdings, has an expense ratio of 0.95%, meaning investors will pay $95 in annual fees on a $10,000 investment.

The Cambria Cannabis ETF (TOKE), on the other hand, is the cheapest on this list with an expense ratio of 0.42%. It is a global, all-cap ETF that targets 20 to 50 of the top cannabis companies worldwide and is considered a low-cost option among cannabis ETFs that don't use leverage.

It's important for investors to consider the expense ratio when deciding whether to invest in an ETF, as it can impact their returns over time. However, it's also crucial to remember that a higher expense ratio doesn't always mean poorer performance. In the case of MJ, its performance has been choppy and highly speculative, with wild swings that have characterized the cannabis space.

Overall, while MJ's expense ratio is on the higher side, it provides investors with exposure to a diverse range of cannabis stocks, which may be attractive to those who believe in the long-term growth potential of the industry.

Sky-high valuations

The Horizons Marijuana ETF's top three holdings are Aurora Cannabis, Canopy Growth, and Tilray. ETFMG's top three holdings are Aurora, Tilray, and Cronos Group.

Tilray has become the poster child for what an overvalued stock looks like. Its market cap has skyrocketed to close to $14 billion despite having a lower annual production capacity than several of its peers with lower valuations. However, Tilray isn't the only top marijuana stock held by the ETFs that is arguably way overpriced.

I think that the growth prospects of the major Canadian marijuana growers over the next several years do not justify many of the market caps of these stocks. If the bubble pops, investors thinking that buying marijuana ETFs will provide diversification and reduce volatility will have a rude awakening.

The reason only a handful of stocks account for a large portion of these exchange-traded funds' net assets is that they're both heavily weighted with stocks with large market caps.

Let's say you invested $2,000 in each of the top 10 stocks held by the Horizons Marijuana ETF and held them for one year. Using a discount broker, your commissions would total no more than $50 — less 0.25% of the total $20,000 investment. That's a lot less expensive than the expenses associated with buying the ETF. And you get nearly as much diversification and exposure to the cannabis industry as the ETF provides.

Ignoring the US market

Should You Invest in MJ ETFs While Ignoring the US Market?

The global cannabis market is experiencing significant growth and evolution, driven by changing customer preferences, emerging trends, local special circumstances, and underlying macroeconomic factors. Customer preferences are shifting towards cannabis products for medicinal and recreational purposes, with the global market projected to reach USD 444.34 billion by 2030. This shift is driven by the growing awareness of the health benefits of cannabis and its increasing acceptance for recreational use.

When considering investing in MJ ETFs while ignoring the US market, it is important to understand the dynamics of the global cannabis industry excluding the US. Here are some key points to consider:

Global Market Trends

• Europe: The cannabis market in Europe is growing but at a slower pace compared to North America. The regulatory environment and cultural attitudes are evolving, creating opportunities for market players. Germany, Finland, and Israel have taken bold steps in allowing medical marijuana use due to its therapeutic benefits.
• Asia: Cannabis regulations are more stringent in Asia, but changing attitudes, particularly for medicinal purposes, are creating opportunities in countries like Thailand and South Korea.
• South America: Countries like Uruguay and Colombia have emerged as key players due to favourable regulations and conducive growing conditions. The region's rich history of cannabis cultivation and increasing acceptance for medical use are driving market growth.

MJ ETF Considerations

• Diversification: MJ ETFs provide exposure to a basket of global cannabis stocks, reducing the risk associated with investing in individual stocks. The Amplify Alternative Harvest ETF (MJ) is a globally focused ETF that tracks companies benefiting from medicinal and recreational marijuana legalization initiatives worldwide.
• Performance: While the performance of MJ ETFs is influenced by industry trends, they may provide more stability compared to individual stocks. The Amplify Alternative Harvest ETF (MJ) has gained about 27% year-to-date as of May 2024.
• Risk and Volatility: Investing in MJ ETFs carries risks due to the volatile nature of the cannabis industry. Regulatory changes, competition from the illicit market, and poor management have impacted the performance of cannabis stocks. It is crucial to carefully evaluate these risks and conduct due diligence before investing.
• Expense Ratio: MJ ETFs typically have an expense ratio, which is a percentage of the fund's assets used to cover management and operational costs. For example, the Amplify Alternative Harvest ETF (MJ) has an expense ratio of 0.78%.
• Dividends: Some MJ ETFs pay dividends, providing an additional source of return. For example, the Amplify Alternative Harvest ETF (MJ) pays dividends with a yield of 2.8%.

In conclusion, while ignoring the US market may exclude some of the largest cannabis companies, there are still significant opportunities in the global cannabis industry. Investing in MJ ETFs can provide exposure to this growth while potentially reducing risk through diversification. However, it is important to carefully consider the risks and volatility associated with the industry and conduct thorough research before making any investment decisions.

Diversification and volatility

The MJ ETF provides cannabis stock diversification, but investors need to be able to tolerate short-term volatility. The ETF is exposed to industry risk, but it is likely to be more stable than owning individual stocks.

The ETF currently holds 38 stocks with about 70% of its allocation to pot companies and growers. The top 10 holdings represent about 60% of the fund's holdings. It includes stocks from companies like Aurora Cannabis, GW Pharmaceuticals, Cronos Group, Canopy Growth, Tilray, and Green Organic Dutchman Holdings.

The ETF also has an allocation of tobacco stocks and fertilizer companies. The diversification of the MJ ETF makes it more robust than any individual stock in the sector, limiting volatility and downside while retaining exposure to the market's potential upside.

However, it is important to note that the cannabis industry is still in its early stages, even in Canada, and is almost non-existent globally. The legalized marijuana industry is highly dependent on the recreational aspects of cannabis, which makes it a risky and volatile investment.

The MJ ETF investors should be prepared for wild swings and high volatility, especially around the earnings release dates of the marijuana stocks that make up the ETF. The valuations of marijuana stocks can change suddenly and drastically due to event-driven company news or industry developments.

The MJ ETF provides a long-term view of a growth industry that is expected to reach tens of billions globally in the next decade or two. However, the individual stock prices that make up the ETF can be choppy.

Overall, the MJ ETF offers some safety through diversification, but investors should carefully consider their risk tolerance and conduct thorough due diligence before investing in this volatile sector.

Cannabis industry in Canada

Canada was the second country in the world to legalise the cultivation, possession, acquisition, and consumption of cannabis and its by-products, after Uruguay. This occurred with the passing of the Cannabis Act in 2018, which also allowed for the production and sale of cannabis edibles, extracts, and topicals. The legalisation of cannabis in Canada has led to a boom in the country's cannabis industry, with companies that cultivate, grow, and distribute cannabis and related products for both recreational and medical use.

The Canadian cannabis industry includes companies that are publicly traded in the US or Canada, such as Tilray Brands, Sundial Growers, High Tide, TerrAscend, Aurora Cannabis, Village Farms International, and Canopy Growth. These companies have operations in various countries, including the US, Europe, Australia, and Latin America.

The legalisation of cannabis in Canada has been accompanied by regulations similar to those for alcohol, including age restrictions, limitations on home production, distribution, consumption areas, and sale times. The legalisation has also been followed by the development of licensed retailers and growers, with the number of licensed growers increasing from 82 in late 2017 to 117 in October 2018.

The Canadian government has also implemented taxation on cannabis products, with a federal excise tax shared between the federal government and the provinces and territories. The final retail price of cannabis products includes provincial sales tax, which varies between 5% and 15% depending on the province.

The legalisation of cannabis in Canada has had an impact on the industry, with an increase in the number of licensed producers and retailers, as well as the development of new products such as edibles and topicals. However, the industry has also faced challenges, including competition from the illicit market and concerns about oversupply.

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