Horizons ETFs Management revealed plans to list futures contracts for the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) and to launch three new “inverse and inverse leveraged ETFs.”
According to the Globe and Mail, leveraged ETFs are also commonly known as double ETFs and seek to provide investors with “two or three times the return on their stated index.” However, these have a higher risk than the more traditional index.
Horizons said the futures contracts on HMMJ will start trading on Monday on the Montreal Exchange and will have quarterly expiration dates for January, March, June and September with an initial extension to a June 2019 expiry.
“For us, this further legitimizes Marijuana-equity investing and HMMJ as the key way to get broad index exposure to this rapidly growing sector,” said Steve Hawkins, president and co-CEO of Horizons ETFs.
Overview of the new proposed ETFs
The information for the three new proposed ETFs isn’t final, but as of Monday is listed as:
- BetaPro Canadian Marijuana Companies 2x Daily Bull ETF (HMJU): Seeks daily investment results. Before established costs, this ETF will look to correspond two times the daily performance of the Solactive Canadian Marijuana Companies Index.
- BetaPro Canadian Marijuana Companies -2x Daily Bear ETF (HMJD): This new ETF will also compare itself to the Solactive index but will seek to create two times the opposite of its daily performance.
- BetaPro Canadian Marijuana Companies Inverse ETF (HMJI): Similarly HMJI will use the Solactive index as a comparison, except this ETF will seek to correspond one time the inverse of the daily performance of Solactive.
Hawkins said Horizons believes there is demand for a riskier option by way of leveraged ETFs that create “higher short-term returns.”
Horizons estimates HMJI and HMJD will carry a hedging cost between 10 and 25 percent per year of the aggregate notional exposure. This cost is credited to the high price of borrowing securities from cannabis companies.
“If used appropriately, inverse marijuana ETFs could be a potentially more liquid and easier way for investors to get short exposure to Canadian-listed marijuana stocks while limiting their risk to what they invested,” Hawkins cautioned.
Horizons plans to stick with the law when it comes to exposure to US stocks or even recreational Canadian stocks until cannabis becomes fully legal. On the changes needed for the ETFs to allow US exposure Horizons wrote:
Unless and until the US Congress amends the US Controlled Substances Act with respect to cannabis, there is a risk that federal authorities may enforce current U.S. federal law against businesses operating in the U.S. cannabis industry, which may adversely affect the market price of any constituent issuers that have exposure to the US cannabis industry, and therefore the value of a New ETF
Horizons explained that if a constituent from one of its indexes gets delisted from the Toronto Stock Exchange or TSX Venture because of breaching the guidelines from these TMX Group exchanges then it will also be removed from the index.
“Any security imbalances caused by material rebalances or trading halts can affect the marked-to-market value of the forward documents negatively on any given day in relation to the closing level of the underlying index,” Horizons wrote.
Horizons started the first ETF focused exclusively on cannabis stocks, HMMJ, which has some of the biggest licensed producers as its top holdings. So far in 2018 HMMJ has seen a 4.71-percent decline in value and is currently priced at C$18.54. In March, HMMJ added 10 more cannabis listings for the overall index, bringing it to a total of 40 stocks.
“HMJR will exclusively invest in marijuana growers that, in our view, are well-positioned to take part in the global growth of the marijuana sector,” Hawkins said in a statement from the Aequitas NEO Exchange. HMJR is currently priced at $C8.25.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.