Bullish did a deep dive into the current state of weed-focused ETFs. Which ones are blazin’ hot and worth watching? And which investment funds are the equivalent to mids and shake?
America’s recreational cannabis industry has been a fast-growing (albeit volatile) juggernaut that keeps expanding and evolving in real-time.
Nearly a decade after Washington State and Colorado became the first states to pass adult-use weed bills, 15 more states have followed their lead. In 2021 alone, five states have successfully voted to legalize the plant — including New York, where its residents consume the most weed out of any state on the East Coast.
Despite the piecemeal, state-by-state growth of this industry, the business of bud is already booming. Globally, regulated and illicit cannabis together is worth an estimated $340 billion. Cannabis consumption has also spiked 60% over the past decade.
And, in the last few years, marijuana companies have made their way on to stock exchanges in both the U.S. and Canada. Many of these early players have been operators based in Canada, where cannabis has been federally legal since 2018. However, U.S.-based companies are starting to get into the mix, as well.
That said, this country has a ways to go before the cannabis industry can reach its true potential. The plant is still federally illegal, with restrictions in place on banking, importing and exporting, and even product testing (remember, the FDA is a federal agency, and therefore cannot regulate something the feds consider “illicit”). But that hasn’t stopped bullish investors from placing early bets on the future of the legal industry.
While we’ve already put together a guide on how to start investing in the cannabis space, Bullish wanted to go a little deeper and hone in on the current state of weed-focused exchanged-traded funds, or ETFs. Which ones are blazin’ hot and worth watching? And which investment funds are the equivalent to mids and shake?
A Quick History to the Cannabis Stock Space
Weed is not new, but weed companies trading on public markets? That’s new. Or at least new-ish. There are currently nine ETFs dedicated to the cannabis industry, which frames it as a nascent and unestablished space in the grand scheme of the stock market.
Many of the ETFs serving this space were launched in 2019 and 2020. The oldest one, ETFMG Alternative Harvest ETF ($MJ), was launched in December 2015. By looking at the performance of $MJ against other marijuana ETFs (and against the tech-heavy NASDAQ 100) we can plot the struggle that weed bulls faced in placing bets on up-and-comers in the legal market.
In the graph above, the dark blue line represents $MJ, which launched nearly two years before any other cannabis ETFs attempted to enter the space. Since inception, $MJ has struggled to grow. When compared to the NASDAQ 100 — a tech-heavy index strategy represented by the orange line on the graph — you can see that marijuana investors have quite literally been left in the dust.
In 2019, you see several lines begin to plot their course on the graph. Each individual line starting represents the beginning of a new cannabis ETF. In this case, we’ve pictured the four biggest cannabis ETFs by assets under management (AUM) as they got out of the gate. Many of these ETFs share similar assets. But broadly speaking, none of these ETFs are identical: They are just strongly correlated through the booms and busts, and there have been quite a few.
Throughout 2018, the ETFMG Alternative Harvest ETF ($MJ) experienced volatility as some of its biggest holdings were taken on a wild ride. During this time, the prominent Canadian cannabis operation Tilray became the focal point of a GameStop-esque short squeeze. However, once the market had its heyday with weed, the fluctuations settled down. For nearly two years, publicly traded cannabis players were hammered.
Recently, the cannabis industry has gained more momentum in the wake of Joe Biden’s election, as well as Congress now being controlled by Democratic leadership. Despite that initial excitement, many marijuana investors are still underwater: Only one marijuana ETF has traded in the green from its inception.
Regardless of the initial disappointments of cannabis companies listed on stock exchanges, there are a few reasons to be optimistic about the long-term performance of the global pot market. After all, we’re still in the early innings of the legal industry’s growth in Canada, and more and more states are legalizing recreational use in the United States. So let’s dive a bit deeper and examine the biggest weed ETFs currently out there and highlight what you need to know about them.
ETFMG Alternative Harvest ETF ($MJ)
The oldest cannabis ETF is ETFMG’s Alternative Harvest ETF, which listed in December 2015. That first-mover advantage has also helped it become the biggest “marijuana ETF” by far. On April 20, 2021, $MJ had nearly $1.7 billion assets under management.
This ETF predates many of the biggest publicly listed cannabis companies in today’s market, which meant it was originally filled with industry-adjacent players who were expecting to make moves in the cannabis industry. In recent years, $MJ has started to include new players in their ETF as the number of growers and pure-play cannabis companies on the stock market has increased.
However, $MJ is still not a pure play for marijuana investors. It includes ancillary companies such as GrowGeneration, which offers gardening products to the industry, and GW Pharma, a company making CBD and THC-based pharmaceuticals (which is known for developing Epidiolex, the first cannabis-derived drug to be approved by the FDA). The two companies take up 16% of $MJ’s fund, which has prompted reservations from investors. But if you take a closer look, it’s these companies which are responsible for keeping $MJ a performer in this market. GrowGeneration has risen 997% in the past year and GW Pharmaceuticals’ stock has risen 122% on news that the company will be bought out.
Without $MJ’s flexibility, the fund would probably be doing much worse than it is. The ETF trades 21% below its offering price on Dec. 4, 2015. Since its inception, the ETF’s annualized return has been a paltry 3.6%. In other words: Industry-adjacent players have carried up-and-comers in the industry who have not posted the profits to back the hype on Wall Street.
AdvisorShares Pure US Cannabis ETF ($MSOS)
Many cannabis businesses trading on U.S. markets are based in Canada, which is sort of ironic. However, there are still dozens of U.S.-based cannabis companies to invest in. The only problem? You’ve probably never heard of most of them, many are “unproven” OTC companies you can’t trade on your Robinhood app and there are still many obstacles to operating a legal weed business in the United States.
This is where AdvisorShares Pure U.S. Cannabis ETF comes in. $MSOS is the latest marijuana ETF to launch, but it has already become the second biggest marijuana ETF by a sizable margin. As of April 20, 2021, the ETF manages approximately $982 million in assets. Unlike $MJ, $MSOS is largely invested in U.S.-based cannabis operators. Their largest four holdings comprise 42% of the fund and include Trulieve Cannabis, Green Thumb Industries, Curaleaf Holdings, and Cresco Labs.
Since the $MSOS ETF launched in September 2020, the ETF has managed to return nearly 70%. This impressive growth might be attributable to solid due diligence on these burgeoning companies.
AdvisorShares Pure Cannabis ETF ($YOLO)
No, we did not make a spelling mistake: AdvisorShares offers two cannabis ETFs. One is dedicated exclusively to U.S.-based companies, and the other offers global exposure. $YOLO launched in April 2019 and shares 13% of its fund weight with $MSOS as of April 20, 2021 (the percentage was calculated using ETFRC.) Despite its head start on its sister fund, $YOLO holds less than half the assets of $MSOS as of this writing, with $364.8 million assets under management.
Its four largest holdings comprise 33.1% of the fund and include Village Farms ($VFF), Innovative Industrial Proper ($IIPR), Aphria ($APHA) and Canopy Growth ($CGC). 61.4% of the fund includes companies based in the United States (many of which are in the $MSOS fund), 28.7% of the fund is based in Canada (mostly “bigger” marijuana players). The remainder is stowed away in companies based in the United Kingdom and Israel. This helps make $YOLO an attractive, well-rounded ETF for people seeking global cannabis exposure — which could be a financial boon once global exports become a reality.
However, that global exposure doesn’t necessarily mean it has been all sunshine for $YOLO HODL’ers. Since the fund was started in April 2019, its annualized return comes out to just 1.01%. In the last year, the fund has added 210.8% — buoyed by increasingly positive outlooks for U.S. legalization and growth in the existing Canadian market.
Global X Cannabis ETF ($POTX)
Thematic ETF issuer Global X hopped on the cannabis train with the launch of $POTX in September 2019. The ETF is currently one of the cheapest ways to invest in global cannabis, boasting a 0.51% expense ratio. One notable thing about $POTX is its heavy allocation in favor of mid- to large-cap Canadian operators: Nearly 80% of its assets are held in Canadian companies. Its biggest four holdings represent 33.6% of the fund and include GW Pharmaceuticals ($GWPH), Aphria ($APHA), Tilray ($TLRY) and Organigram ($OGI.CN).
In many ways, $POTX looks and feels like a cheaper version of the industry-leading ETF, $MJ. With just around $174 million in assets under management, it’s also one of the smaller ones. Since $POTX was established, it has delivered an average annualized market return of -21.7%.
The Cannabis ETF ($THCX)
One of the more well-rounded ETFs for cannabis is the very imaginatively named “The Cannabis ETF”, which trades as $THCX. The company’s top four holdings include Aphria ($APHA), Village Farms International ($VFF), GrowGeneration ($GRWG) and Canopy Growth Corp ($CGC). Collectively, these companies make up just 22.3% of the fund. That means there’s a whole lot of diversity in the remaining holdings.
The ETF launched in July 2019 and has fallen 26.8% from its offering price. Its annualized returns are -15.6% since inception. It spent 112 trading days in 2020 at a discount, which means that the ETF was discounted relative to its total assets. In the first quarter of 2021, it spent 32 trading days at a discount, outweighing the number of days trading at face or a premium. In short: This could imply that investors are not as interested in $THCX or its assets at the moment.
Plotting the Future
The legal cannabis industry is still in the early innings of its growth. When the first cannabis ETF launched in 2015, the entire legal cannabis market was worth approximately $4.8 billion in the United States. The majority of that $4.8 billion was in the legal medical market. In 2018, that story changed as states changed tune: The legal recreational market has exceeded the impact from the medical market, and continues to grow much faster on the whole.
It’s also beginning to change even further south in Mexico, which is planning to legalize the plant nationwide in the near future. If Mexico successfully legalizes recreational weed, the country’s 120 million people will make it the biggest international market. Canada, a country of just 37 million people, generated $2.6 billion in recreational sales in 2020. Mexico’s population is more than three times that of Canada’s, proving the possibility for massive untapped potential. The same goes for other countries that might legalize in the future, including Israel, Colombia, and potentially even the UK.
The cannabis market is growing — make no bones about it — but we have not seen that growth translate to success for many ETFs. How this will impact existing cannabis players, including the ones in the aforementioned five ETFs, is untold. However, the prospect of weed exports to and from these high-energy markets might start to fill the lack of supply for a market that appears to be in high demand. And, once banking restrictions are lifted in the US, the whole industry will benefit.
By next 4/20, the world might look different. One thing is for sure: We will have more answers about the trajectory of this burgeoning space in due time.