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Cannabis ETFs

Find out about cannabis ETFs, the risks and what you need to consider when investing in cannabis.

Since cannabis was legalized in Canada in 2018, more and more companies have entered the industry as growers, developers, distributors and retailers.

Even big brands like Molson Coors Brewing and Scotts Miracle-Gro have profited—either directly or indirectly—from the surge in demand for cannabis products. Molson Coors has partnered with HEXO to produce cannabis-infused beverages in the US. And growers are buying from companies like Scotts Miracle-Gro to meet the increased demand for cannabis plants.

Investors can also benefit by buying into exchange-traded funds (ETFs) that track companies that have heavily invested in the cannabis industry. Here’s what you need to know about investing in cannabis ETFs plus key ETFs to keep your eye on.

The cannabis market

Cannabis has come a long way from secretive puffs in student digs. Forbes reports that, in Canada, the sale of adult-use cannabis products has increased from $1.2 billion in 2019 to $2.6 billion in 2020. By the end of 2021, sales are expected to increase by another 60%.

Recent medical research has shown that cannabis may help with a range of medical conditions, from epilepsy to multiple sclerosis. As a result, many CBD products have been developed for therapeutic or medical purposes.

Recreational use of cannabis is also expected to rise. To date, 23 countries, and 33 US states, have legalized the use of marijuana for medical purposes. There appears to be increased momentum among governments to decriminalize the individual, recreational use of cannabis.

CBD in Canada: Products, regulations and uses

Do cannabis stocks perform well?

The excitement surrounding the liberalization of cannabis rules has impacted the stock prices of cannabis companies, which have expanded significantly in recent years. If you want to track the market as a whole, check out cannabis indices like the Canada Cannabis Spot Index and the Hemp Spot Price Index.

Past performance does not necessarily indicate future performance. CBD stocks may simply have been enjoying a few good years. External events like trade restrictions, political regulations, social movements and even wars can impact the industry and affect the value of cannabis investments.

Be sure to consider a wide range of factors before investing such as upcoming legal changes in Canada and other countries, new companies that are entering the market and the financial reports of existing cannabis companies.

Cannabis stocks

Cannabis stocks typically fall into three main categories: growers, distributors and support specialists.

  • Growers specialize in cultivating cannabis plants on an industrial scale. These growers will generally focus on the medical cannabis market, making sure that their products are grown to the right quality. They will aim to distribute through partnerships with major medical or consumer groups. Most of these companies are listed in the US and include names such as Canopy Growth and Aurora Cannabis.
  • Distributors will use marijuana in their products or offer a distribution mechanism for growers. These may be drug companies that use it for medical applications or consumer companies that use it in drinks or food. These companies include New Age Beverages, which makes cannabis-infused drinks and Harvest Health & Recreation, a Canada-based cannabis company that provides dispensaries and production facilities for medicinal and recreational marijuana. This will also include a number of wellness brands.
  • Support specialists are those companies providing services to the marijuana growers. This may be industrial warehousing, or fertilizers or developers of hydroponic technologies, which are used by many marijuana growers. Most of these companies are based in the US or Canada, where the market is most developed.

How to invest in marijuana stocks

Cannabis ETFs

As the cannabis market has developed and new companies have emerged to support it, a number of cannabis ETFs have emerged investing in a diversified portfolio of marijuana-related names. These funds have all the usual advantages of ETFs – they offer low cost access to a diversified portfolio of specialist companies, trade on recognized stock exchanges and save the investor the hassle of researching individual cannabis-related businesses.

That said, the cannabis industry is relatively concentrated, so even the most diversified ETF will tend to focus significantly on a number of large names. There is some considerable variation in the objectives of marijuana ETFs, reflecting the fact that this is an emerging sector and the key benchmarks are not yet well-established.

Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ)

Risk profile: 7/7
The Horizons Marijuana Life Sciences Index ETF follows the North American Marijuana Index. This index tracks publicly-listed North American life sciences companies with operations in the marijuana field. HMMJ stocks are available on the Toronto Stock Exchange.

Top holdings

HoldingPortfolio weight
Tilray Inc22.73%
Canopy Growth Corp12.45%
Innovative Industrial Properties Inc9.75%
Cronos Group Inc9.62%
The Scotts Miracle Gro Co8.54%
GW Pharmaceuticals PLC7.52%
GrowGeneration Corp3.25%
Hydrofarm Holdings Group Inc3.08%
Village Farms International Inc3.02%
Charlottes Web Holdings Inc2.88%

The Medical Cannabis and Wellness UCITS ETF (LSE: CBDX.L)

Risk profile: 7/7
The Medical Cannabis and Wellness UCITS ETF was the first UCITS-compliant ETF to launch in Europe. It follows the Medical Cannabis and Wellness Equity Index from Solactive. CBDX stocks are available on the London Stock Exchange.

Top holdings

HoldingPortfolio weight
GW Pharmaceuticals PLC18.42%
The Scotts Miracle Gro Co14.30%
Amyris Inc12.65%
Innovative Industrial Properties Inc11.94%
Arena Pharmaceuticals Inc11.18%
GrowGeneration Corp7.53%
Hydrofarm Holdings Group Inc5.51%
Cara Therapeutics Inc2.99%
Turning Point Brands Inc2.77%
Charlottes Web Holdings Inc1.73%

Rize Medical Cannabis & Life Sci ETF (LSE: FLWR.L)

Risk profile: 7/7
This ETF aims to provide exposure to “those companies positively exposed to the revolution in cannabis-derived medicine”. The group points to the tailwinds of favourable legislation, social acceptance, medical recognition and pharmaceutical applications. “Cannabis-derived pharmaceutical drugs are now available to treat symptoms associated with multiple sclerosis, certain types of cancer and rare forms of childhood epilepsy, including Lennox-Gastaut syndrome and Dravet syndrome.”

The ETF is based on the Foxberry Medical Cannabis & Life Sciences Index. It remains small, at around $1.7 million, but only launched in February of 2020. FLWR stocks are available on the London Stock Exchange.

Top holdings

HoldingPortfolio weight
The Scotts Miracle Gro Co16.93%
GrowGeneration Corp15.89%
GW Pharmaceuticals PLC15.00%
Amyris Inc10.54%
Arena Pharmaceuticals Inc7.82%
Corbus Pharmaceuticals Holdings Inc7.25%
Zynerba Pharmaceuticals Inc5.93%
AbbVie Inc2.56%
Teva Pharmaceutical Industries Ltd2.50%
India Globalization Capital Inc2.49%

Key risks of cannabis ETFs

In recent years, the move in the cannabis industry has been towards liberalization. Restrictions have been lifted on the use of cannabis for medical and consumer purposes. Cannabis-based consumer products are increasingly widely available, which has supported growers, distributors and support services. As such, the key risk for most companies is whether this trend will reverse if policymakers decide to reign in their liberalization efforts.

Additionally, the marijuana market is still relatively concentrated with only a small number of stocks offering exposure. When there is excitement around the marijuana market a lot of capital can be directed at relatively few companies. This has the potential for stocks to see high valuations, even moving into “bubble” territory.

Cannabis is a relatively new market. As such, many of the companies involved are still small. This inevitably brings some risks: smaller companies may not be as liquid and may struggle to raise capital to grow. They may be more vulnerable to shifts in market conditions. Any cannabis ETF will have a proportion of its investments in this type of company.

Bottom line

As regulations continue to lift on marijuana for both medical and personal uses, new and exciting opportunities continue to emerge for investors. ETFs are just one way for investors to benefit from market growth without the risks of relying solely on stocks in a handful of companies.

Want to learn more? Check out our beginner’s guide to exchange traded funds.

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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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