The marijuana sector has flourished rapidly in the last few years. Are cannabis ETFs the next step?
Exchange-traded funds (ETFs) have long been a popular option for investors who don’t want to be tied to particular companies. While ETFs are traded like stocks, they are made up of baskets of assets — including stocks, bonds and commodities — and can give investors more flexibility.
No cannabis ETFs exist at the moment, but a strong push is being made to create at least two of them. Midway through February, ETF Managers Trust filed paperwork to list a cannabis ETF on the NYSE Arca. According to MarketWatch, it will be called the Emerging AgroSphere ETF, and will track medical cannabis companies that produce or sell hemp-based products. It will also track companies focused on researching cannabidiol and cannabis use in prescription drugs.
A cannabis ETF in Canada is gaining some traction as well. In late February, Horizons ETFs Management filed a preliminary proposal to list the Horizons Medical Life Sciences ETF on the TSX. It will provide exposure to “North American publicly listed life sciences companies in the marijuana industry,” says Advisor.ca. Read on to learn more about these two proposed ETFs and what they could mean for cannabis in the US and Canada.
Cannabis ETFs: Emerging AgroSphere
As mentioned, ETF Managers Trust’s proposed ETF will focus on medical marijuana companies, at least initially. It explains in its filing with the US Securities and Exchange Commission that the ETF won’t invest in companies that serve the non-medical marijuana markets in the US, Canada “or any other country unless and until such time as the production and sale of non-medical marijuana becomes legal in the United States, Canada, or any other such country, respectively.”
The ETF will be made up of approximately 69 companies, including: GW Pharmaceuticals (OTCMKTS:GWPRF) and Abbot Laboratories (NYSE:ABT).
While some investors may be disappointed that the ETF won’t focus on the non-medical marijuana market, it’s worth noting that the medical cannabis space is expected to grow significantly in the coming years. In the US the medical marijuana market could be valued at $21.6 billion by 2021, up from $6.9 billion in 2016.
The Emerging AgroSphere ETF hasn’t been approved yet, and its ticker symbol and potential launch date are still unknown.
Cannabis ETFs: Horizons ETFs Management
The Horizons Medical Life Sciences ETF will also reportedly be focused on medical, not recreational, marijuana companies. BNN says it will attempt to track Solactive’s North American Medical Marijuana Index, and “is expected to include 18 companies from a variety of subsectors, including biopharmaceuticals, medical manufacturing, distribution, bio products and other ancillary businesses related to the marijuana industry.”
It also has not been approved and does not have a launch date; however, Horizons ETFs Management has said it will trade under the symbol HMMJ.
Cannabis ETFs: Potential risks
While excitement is bubbling about both proposed ETFs, some experts are warning investors to exercise caution.
For one thing, the future of marijuana in the US under Trump is still uncertain. The Hill recently reported that members of his administration have said they plan to enforce more strict drug laws. “I’m dubious about marijuana. I’m not sure we’re going to be a better, healthier nation if we have marijuana sold at every corner grocery store,” the news outlet quotes Attorney General Jeff Sessions as saying.
Additionally, Khurram Malik, head of research at Jacob Capital Management, told BNN that it’s possible that the proposed cannabis ETFS “might not be the pure play investors might be looking for in the marijuana space.”
“A few other ETFs will be launching in the next little while later on this year, as well,” he explained. “The tricky thing is, can you put enough constituents to put into the ETF to meet those really strict requirements in terms of liquidity hurdles, in terms of market cap hurdles, et cetera.”
Similarly, Advisor.ca notes that investors interested in the Horizons Medical Life Sciences ETF will have to make transactions on a smaller exchange, which can mean less liquidity, more volatility and more expensive transaction fees, as well as settlement delays.
For now, investors would do well to watch for more information about both proposed ETFs. If they pan out as hoped, it certainly will bode well for a prosperous future in the industry.
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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.