All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Cannabis ETFs
Find out about cannabis ETFs, the risks and what you need to consider when investing in cannabis
Investing in cannabis is actually legal, despite the fact that it’s illegal to possess, grow or sell cannabis here in the UK. This is because it can be used medically. The UK is the largest exporter worldwide of legal cannabis and it’s thought to be the “next big thing in investing”. There are some cannabis exchange-traded funds (ETFs) which group together cannabis related investments. Find out how you can invest in cannabis ETFs and some key considerations when investing in cannabis.
The cannabis market
Cannabis has come a long way from furtive puffs in student digs. With increasing consumer and medical applications, a new report from Prohibition Partners predicts that the UK’s legal cannabis market could reach $1.3 billion (£0.95 billion) by 2024. Around half of this growth will come from the medical cannabis market: recent medical research has shown the efficacy of cannabis in treating a range of medical conditions, from epilepsy to multiple sclerosis. The report estimates that nearly 340,000 active patients will ultimately use cannabis oil.
There is also expected to be a liberalisation of the rules on the recreational use of cannabis. To date, 23 countries, and 33 US states, have legalised the use of marijuana for medical purposes. There is also an increased momentum among governments to decriminalise its recreational use.
Do cannabis stocks perform well?
Invariably, the excitement around the liberalisation of cannabis rules has been reflected in the share prices of cannabis companies, which have seen significant expansion in recent years. There are also a number of cannabis benchmarks – the Canada Cannabis spot index, the Hemp index and a number of US cannabis wholesale price benchmarks.
This doesn’t mean to say that they tend to perform well, it could have just been a good few years for cannabis stocks. You want to take several factors into consideration, such as upcoming changes in the law, new companies on the horizon and the key details of cannabis companies.
Cannabis stocks
Cannabis stocks typically fall into three main categories: growers, distributors and support specialists.
- Growers specialise 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.
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 recognised exchanges and save the investor the hassle of researching individual cannabis-related names.
That said, the cannabis industry is relatively concentrated, so even the most diversified ETF will tend to have a significant amount in 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.
Medical Cannabis and Wellness ETF
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.
Top holdings
| Holding | Portfolio weight |
|---|---|
| GW Pharmaceuticals PLC | 18.34% |
| Scotts Miracle-Gro Co | 14.49% |
| Innovative Industrial Properties Inc | 12.72% |
| Amyris Inc | 11.98% |
| Arena Pharmaceuticals Inc | 10.71% |
| GrowGeneration Corp | 7.55% |
| Hydrofarm Holdings Group Inc | 5.07% |
| Cara Therapeutics Inc | 3.72% |
| Turning Point Brands Inc | 2.68% |
| Charlotte’s Web Holdings Inc | 1.77% |
Rize Med Cannabis UCITS ETF
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.
Top holdings
| Holding | Portfolio weight |
|---|---|
| GrowGeneration Corp | 16.84% |
| Scotts Miracle-Gro Co | 16.84% |
| GW Pharmaceuticals PLC | 13.71% |
| Amyris Inc | 12.14% |
| Arena Pharmaceuticals Inc | 7.02% |
| Corbus Pharmaceuticals Holdings Inc | 6.93% |
| Zynerba Pharmaceuticals Inc | 5.54% |
| Cara Therapeutics Inc | 2.58% |
| India Globalization Capital Inc | 2.56% |
| Teva Pharmaceutical Industries Ltd | 2.45% |
Key risks of cannabis ETFs
In recent years, the move in the cannabis industry has been towards liberalisation. Restrictions have been lifted on the use of cannabis for medical purposes and, also, to a lesser extent for consumer purposes. Cannabis-based consumer products are increasingly widely available and this has supported growers, distributors and support services. As such, the key risk for most companies is that this trend reverses and policymakers reign in liberalisation efforts.
Equally, 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
This is a nascent market but could be an exciting one over the next few years as regulations are lifted on marijuana and its use becomes more widespread in medicine and in consumer applications. ETFs remain one of the only ways investors can participate in the growth of the market without the risks of picking individual stocks.
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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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