Cannabis-focused exchange-traded funds have emerged over the past few years in the United States, Canada and now Europe, but their recent sharp declines have mirrored tumbling marijuana stocks and made it tougher for some ETF operators to attract investors.
But the longer-term outlook for ETFs – where baskets of marijuana securities are traded as one stock – appear bright, industry experts said, citing the future growth potential of the cannabis industry.
That said, the current picture isn’t pretty for ETF investors and operators.
Some ETFs are down about 50% compared to this time last year.
The pressure of such a decline has seen some funds such as the Evolve Marijuana Fund on the Toronto Stock Exchange and a related U.S.-focused cannabis fund on the Toronto-based NEO Exchange fall by the wayside and close.
Tim Seymour, who is the owner and manager of Amplify Seymour Cannabis ETF, launched his New York Stock Exchange fund, which controls about $7.5 million in assets, in July 2019.
“Raising money has been challenging for the past nine months,” Seymour said. “I would have preferred it if I had started the ETF fund in July of the previous year.”
Current state of ETFs
The steep slide in marijuana stock prices hasn’t deterred ETF managers from unveiling new products.
One example, Rize Medical Cannabis and Life Sciences ETF, is currently launching on three different European stock exchanges.
It’s no real surprise that sector-specific ETFs will reflect the unpredictable evolution of a young industry, said Jason Wilson, research and banking expert for the largest ETF in the space, New Jersey-based ETFMG Alternative Harvest, which trades on the New York Stock Exchange as MJ.
“There is always this question in an emerging industry as to what is the landscape going to look like,” Wilson told Marijuana Business Daily.
“Companies are going through this process. There has been a lot of jostling to build up production capacity. There is a maturing going on, and it’s going to take some time.”
ETF cannabis investors will need to show similar patience, and there are signs they are doing so.
Even though ETFMG Alternative Harvest has dropped about half its value in a year, for example, the investor base in the $725 million fund has increased significantly, a good sign for industry demand in general, Wilson said.
“Usually, investors flee from a 50% correction but we have more than doubled our shares outstanding.”
Spreading the risk
For retail investors who aren’t well versed in the cannabis market, putting money into an ETF helps spread risk, said Dan Ahrens, portfolio manager of the Bethesda, Maryland-based AdvisorShares Pure Cannabis ETF, which trades on the New York Stock Exchange as YOLO.
Given short-term pessimism in the industry generally, it hasn’t been easy to attract investors for the likes of portfolio managers such as Ahrens, who launched the fund at the end of April last year. The fund currently is worth about $46 million.
While other funds have a policy of not investing in companies that are federally illegal, Ahrens’ fund does invest in U.S. multistate cannabis operators through derivative contracts approved both legally and through the fund’s custodial bank, BNY Mellon.
Holdings therefore include Chicago-based Cresco Labs, Arizona-based Harvest Health & Recreation and Massachusetts-based Curaleaf among others, and Ahrens likes it that way.
“U.S. operators are showing terrific growth, and the upside potential is outrageously huge,” he said. “While there will be some consolidation in the U.S., there is going to be a lot in Canada and a lot fewer companies there.”
Given how young the industry is generally and how difficult it is therefore to predict changes ahead – including which companies might fall by the wayside – there is a need to actively manage such funds, said Ahrens, who, like Seymour, also actively manages his portfolio.
“In an area like cannabis, active management is extremely important as opposed to blindly following an index,” Ahrens said.
Wilson at the ETFMG fund rejects that notion and says his passively managed fund, which tracks an index, is better suited to the volatility of a still very immature industry, especially when there is the consistent specter of federal illegality in the U.S.
“It’s very hard to pick individual winners when you have an industry where there is so little (federal) regulation,” he said. “And, if you look at the Farm Bill passing in 2018 and legalizing hemp, we see that legalization is not enough in itself.”
Big-picture confidence in the cannabis industry
What all the ETF managers can agree on, however, is the need to invest in the industry for the long haul because long-term indicators, including the increasing global attraction and acceptability of the product, are much brighter than current market conditions.
“The macro conditions continue to get better and better and better,” Seymour said. “While there is unlikely to be any federal descheduling (in the U.S.) anytime soon, things are going better than could be expected on the states side.
“We actually have a better story than we did a year ago.”
Nick Thomas can be reached at firstname.lastname@example.org
For analysis and in-depth looks at the investment trends and deals driving the cannabis industry forward, sign up for our premium subscription service, Investor Intelligence.