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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.
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.
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 typically fall into three main categories: growers, distributors and support specialists.
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.
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.
|Canopy Growth Corp||12.45%|
|Innovative Industrial Properties Inc||9.75%|
|Cronos Group Inc||9.62%|
|The Scotts Miracle Gro Co||8.54%|
|GW Pharmaceuticals PLC||7.52%|
|Hydrofarm Holdings Group Inc||3.08%|
|Village Farms International Inc||3.02%|
|Charlottes Web Holdings Inc||2.88%|
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.
|GW Pharmaceuticals PLC||18.42%|
|The Scotts Miracle Gro Co||14.30%|
|Innovative Industrial Properties Inc||11.94%|
|Arena Pharmaceuticals Inc||11.18%|
|Hydrofarm Holdings Group Inc||5.51%|
|Cara Therapeutics Inc||2.99%|
|Turning Point Brands Inc||2.77%|
|Charlottes Web Holdings Inc||1.73%|
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.
|The Scotts Miracle Gro Co||16.93%|
|GW Pharmaceuticals PLC||15.00%|
|Arena Pharmaceuticals Inc||7.82%|
|Corbus Pharmaceuticals Holdings Inc||7.25%|
|Zynerba Pharmaceuticals Inc||5.93%|
|Teva Pharmaceutical Industries Ltd||2.50%|
|India Globalization Capital Inc||2.49%|
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.
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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