In only a few short years, cannabis has emerged as one of the next big market disruptors. Today, as billions of dollars pour into the sector, investors are keen to take part in the anticipated marijuana boom. But before you add marijuana stocks to your portfolio, consider how the unique risks associated with pot stocks may impact profits.
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Top Cannabis Stocks
Finder’s investments experts analyze all S&P 500-listed stocks to curate a list of the best performing stocks. The companies are ranked in average order of both their year-to-date and month-over-month performance.
What ETFs track the cannabis category?
According to VettaFi, there are at least 11 marijuana ETFs listed in the US. Some examples include:
Cannabis refers to plants Cannabis sativa, Cannabis indica and Cannabis ruderalis. This plant can be processed for a variety of purposes, from topical oils and food products to building materials — but it’s popularly grown and consumed for its psychoactive properties.
Cannabis legalization is a divisive subject and the laws that govern its consumption vary by state. Some states, like Washington, Vermont and California, have legalized both recreational and medical marijuana consumption. Others, like Utah, Florida and Pennsylvania, only permit marijuana consumption for medical purposes. In at least 10 other states and under federal law, cannabis consumption is not permitted in any capacity.
Some in Congress are pushing to lift the federal prohibition during the current term, which would be a watershed moment for the industry.
Cannabis stocks are shares of any company that grows, harvests, sells, manufactures or distributes cannabis, including hemp.
Marijuana vs. hemp
Unlike marijuana, hemp is not classified as a narcotic. While hemp and marijuana both come from the cannabis plant, hemp has a lower component of the psychoactive THC — typically less than 0.3% — which means it has no psychoactive effects.
Typically, hemp is used in food products, building materials and textiles. Marijuana, on the other hand, is primarily used for medicinal and recreational purposes.
Why invest in cannabis stocks?
Despite its lack of legality in numerous states, cannabis is a popular product. And state-level government is becoming more open to its use.
Medical marijuana was first legalized in California in 1996. And in 2012, Colorado and Washington became the first states to legalize the plant’s recreational use. Today, medical marijuana use is legal in 41 US states, with 24 of them also allowing adult use of recreational cannabis.(1)
As more states become accepting of medical and recreational marijuana use, the cannabis market grows. And as the cannabis market grows, so do sales, profits and company valuations.
The shift in attitude towards cannabis isn’t limited to the US. In 2018, Canada legalized recreational marijuana use across the country.(2) And other international governments are reassessing their cannabis laws too, potentially paving the way for an explosion of new businesses.
Statista reports that the global cannabis sector is expected to reach $79.50 billion in 2026 and $114.35 billion by 2031. The cannabis market is one poised for growth — and for investors, growth means profit.
Risks of investing in cannabis
Positive growth projections aside, cannabis may not be a practical addition to your portfolio. And that’s because this sector is riddled with risks — many of which stem from the legality issues that surround the product.
As laws that surround the legalization of recreational marijuana continue to shift, investors must be wary about how high tax rates could impact the market. Tax rates have the potential to cripple cannabis providers in states that allow recreational marijuana because of how high consumers are taxed.
For example, in California consumers must pay a 15% excise tax on each purchase, which is on top of state sales tax and any local taxes that cities and counties may choose to impose.(3) With high taxes, people may choose to purchase their product from unregulated providers.
Financing for cannabis companies is also a concern, as cannabis companies are seen as high-risk merchants in the eyes of many financial institutions. As a result, many of these banks aren’t willing to provide essential banking services and funding must be found elsewhere. One way cannabis companies can raise funds is to issue common stock, but this dilutes the holdings of existing investors.
Overall, the cannabis market seems to be gaining traction. And for investors that can tolerate risk, this is an exciting prospect. But ultimately, the variables that factor into the profitability of this market are constantly in flux — and this sort of instability can lead to price volatility.
Market projections for Cannabis stocks
The global cannabis market as a whole is expected to grow and it may gain significant traction in the U.S., where its legality remains contended at the federal level. Again, the market value of the cannabis industry in the U.S. is projected to climb to $51.3 billion in 2023 and nearly $102.9 billion by 2028, according to some estimates.
Moreover, U.S. states continue to relax laws around its usage. Since 2020, the following states have legalized marijuana for recreational use:(4)
Alaska
Arizona
California
Colorado
Connecticut
Delaware
Illinois
Maine
Maryland
Massachusetts
Michigan
Minnesota
Missouri
Montana
Nevada
New Jersey
New Mexico
New York
Ohio
Oregon
Rhode Island
Vermont
Virginia
Washington
The MORE Act, which would decriminalize marijuana at the federal level, passed the House in December 2020, but the bill did not advance to the Senate.(5). In September 2023, House Democrats reintroduced the MORE Act once again, though its future remains foggy.(6) So it’s important to carefully analyze cannabis stocks to find where the potential long-term winners may be.
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While smoking weed is perhaps the most well-known use of cannabis, there are many types of businesses that are positioned to benefit from the growing sector. As more cannabis products are given the green light, we’ll see the market continue to expand. The legalization of many of these products is new and in some cases, still underway:
Medicinal products. Medicinal cannabis is used for the treatment of cancer pain, epilepsy, palliative care, chemotherapy nausea, neuropathic pain, anorexia and neurological conditions. Cannabidiol, also known as CBD, is a derivative of the marijuana plant that’s become increasingly popular for medical uses in recent years.
Research. The scientific study of marijuana has accelerated in recent years with the discovery of many other beneficial compounds besides the psychoactive THC.
Recreational use. Marijuana as a recreational drug is still illegal or restricted in many states. That said, legalization of both recreational and medical marijuana continues to roll out across the US. The plant is consumed to achieve feelings of relaxation or euphoria, but negative side effects have been reported, including headache, dizziness, nausea, delusions and hallucinations. Long-term use of the substance may cause cannabinoid hyperemesis syndrome (CHS).
Food products. Hemp is used as an ingredient in a range of products, including cooking oils, snacks, protein powder, cooking flour and more. The sale of food products made from hemp seeds was authorized under the Agriculture Improvement Act of 2018.
Building materials. Hemp is used in insulation and building construction materials under several names, including hempcrete, hemp masonry and hemplime.
Clothing. Hemp is broadly recognized as one of the most sustainable materials available in the manufacture of clothing.
Beauty products. Hemp is commonly used in various health and beauty products, such as moisturizers, lip balm, makeup and skin oils.
Bottom line
The legal cannabis sector is positioned to grow in the coming years and there are a number of ways to invest. But keep in mind that past performance is not a guarantee of profit and all investments come with inherent risks.
Pot stocks may be a good investment if legalization continues to occur throughout the US. However, like any investment in any public company, you need to do your own due diligence to see if any particular company is worth investing in.
Yes, several marijuana stock ETFs are available to investors. Three examples are the AdvisorShares Pure US Cannabis ETF (MSOS), the ETFMG Alternative Harvest ETFMG Alternative Harvest (MJ) and the AdvisorShares Pure Cannabis ETF (YOLO).
Yes, it's legal to buy cannabis stocks, regardless of whether the consumption of recreational or medical marijuana is legal in your state. When you purchase a stock, you purchase a slice of ownership in a company — not the product itself.
As of this October 2023, AbbVie, Altria and Compass Diversified Holdings all pay dividends to investors.
Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga.
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Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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