How to choose the right cannabis ETF


As the number of companies manufacturing cannabis and cannabis products grows exponentially across the country, discussions around the best opportunities dominate both among seasoned investors and those looking to enter the market for the first time. Are food stocks going to skyrocket? Should we aim for medical marijuana in the long term? What is popular now and what will be popular and profitable in the long run?

Exchange Traded Funds (ETFs) are a natural fit for those who believe in the potential for cannabis value to explode in the years to come – some predict it could grow into a market of almost $ 43 billion by 2024 – but I don’t necessarily want to pick individual stocks. Additionally, the cannabis market is inherently high risk and volatile as states change their laws and new products enter the market, so ETFs can be a great, more stable entry point into the industry.

Choosing the right ETF has its own nuances and things to know before you take the plunge – not to mention the reverse and leveraged ETFs out there. are at the moment six cannabis ETFs that trade in the United States and around 15 that do so globally. One of the most important points to consider is precisely the ownership of each – some focus on medical marijuana or a specific type of product, while others invest in everything from pharmaceuticals to hemp to agriculture. and the culture needed to grow it. Some will focus exclusively on cannabis while others will have it among other products such as tobacco and alcohol.

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“Even if one is trying to invest in an ETF rather than trying to pick individual stocks, they should look under the hood of the ETF,” Dan Ahrens, COO of the management company AdvisorShares investments and portfolio manager for Pure US Cannabis ETF MSOS, which focuses exclusively on US-based cannabis companies, told The Street. “One of the beauties of an ETF is its day-to-day transparency. You can see the holdings of the fund from the previous day. “

What to look for

Ahrens advises anyone trying to invest in an ETF to consider each position point by point. Holdings should be diversified not only by product type, but also by market capitalization, liquidity and amount of daily transactions. High commercial activity may indicate that assets are more likely to be liquid.

“Most of the multistate operators in the United States, just as the name suggests, are moving to other states,” Ahrens said. “Many states already have medical marijuana, but are going to approve the largest market for adult-use marijuana. The main thing is to invest and accumulate but [also] have a very long-term vision for the future. “

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Problems can also arise from a misunderstanding of the ability of companies to penetrate a specific market. Since Canada decided to legalize marijuana in 2018, many Americans who believed in its potential for growth have turned to businesses north of the border for investment opportunities that were not available back home. the time.

But even when Canadian companies like Canopy Growth (CGC) – Get a report and OrganiGram Holdings (OGI) – Get a report started trading on the New York Stock Exchange and Nasdaq, the classification of cannabis as Controlled substance from Annex I federally, this means most are unable to sell their products overseas – inexperienced investors drawn to the current cannabis hype may not always realize that legalization in New York won’t affect not companies that cannot ship there.

The key is to do your research and understand what you are investing in – choosing Canadian ETFs might be a good option for those who see the potential for growth in the country or for companies based in Canada but specializing in the US market. . US-based businesses, on the other hand, have enormous growth potential as more states move towards legalization and decriminalization.

MSOS vs MJ: which is the best cannabis ETF?

The Toronto Horizons ETFs launched the first cannabis ETF, the Horizons Marijuana Life Sciences Index ETF HMMJ ETF, in 2017; it invests in a range of companies working in the manufacture, distribution and biopharmaceuticals of cannabis. Company CEO Steve Hawkins told The Street that a wave of US investors asking how they might invest in HMMJ across borders led to the launch of the Horizons US Marijuana Index ETF HMUS, which the holdings are exclusively US companies operating in the state. level.

“There are about 15 marijuana ETFs in the world,” Hawkins said. “That number will soon start to break down into more specific pieces or sectors of marijuana.” [sector] like oils and gums and vaping. Your subset of companies gets quite small pretty quickly … and you need to be very careful when you see new ETFs and how much they are specified because there can be a lot of illiquidity in this market. “

While analysts disagree on whether federal legalization in the United States is on the horizon, many see New York as a domino state that will lead to more states legalizing cannabis and, in in turn, to an explosion of new American companies that directly cultivate and produce cannabis and create derivative products. These products can be anything from equipment to space rentals to manufacturers of medical products.

ETF to consider

Matthew Carr, chief trends strategist at financial research firm Oxford Club, has advised those who follow the current movement of growing legalization in different states to consider MSOS, as it focuses exclusively on cannabis-based operators. in the USA. For those who want greater international exposure, Carr recommends either the ETFMG Alternative Harvest ETF MJ or the Global X Cannabis ETF POTX, both of which own some of the world’s largest cannabis operators.

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“When you look at ETFs, you have to really understand what you are really buying,” Carr told The Street. “A lot of times people will rush out and buy ETFs because they’re part of a sector, but don’t really dig deeper into what’s actually in it.”

Due to rapid changes in the laws governing cannabis, it is often difficult to predict which successful individual businesses will continue to dominate and which will disappear.

“The lessons learned from legalizing California or legalizing Canada show that there will be this volatility,” Carr said. “There will be these accelerations, then there will be these short withdrawals. If you are looking to trade very short term over the next few months you can, but it is a market that is going to move very quickly over the next five to ten years. “


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