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Marijuana may still be in a legal vacuum, but that has not stopped the market from flourishing. As legalization spreads more and more in various states and across Canada, spending on recreation in the United States alone is expected to exceed $ 47 billion a year over the next decade.
As with any successful market, the more money you pay for money, the more investors you will attract. The industry has grown from a handful of hobbyists to professional companies with industrial and retail locations. They have created formal investment opportunities and stock offerings.
For some investors, it is there that their story ends, with the payment of a sum of money in a single company. Investors who want a little more diversity, however, can explore the ETFs on marijuana.
What is a Marijuana ETF?
As discussed in our article on ETFs, an exchange-traded fund (ETF) is a form of bundling. Like a mutual fund, an ETF is not a single investment. Rather, it is a group of assets, such as equities, bonds, commodities or currencies, grouped into a product that produces its returns based on their overall evolution.
Generally, an ETF is organized around a central theme. It can follow a market or simply be organized by industry or by asset. A fund designed to track the global market capitalization of cryptocurrency is an example, while a fund that collects a series of strong cryptocurrency assets is one example.
Unlike a mutual fund, an ETF is available for purchase on the same basis as common shares. You can buy it at a stock exchange and sell it at will.
A marijuana ETF is an industry-organized ETF, organized around the cannabis industry. This may include a wide variety of companies, but most funds will invest primarily in leisure producers, pharmaceuticals, and research. Some may invest in retail, although this remains a relatively small part of the cannabis industry in value.
Why invest in a marijuana-focused ETF?
There are different reasons to invest in an ETF on cannabis.
The main reason is the risk mitigation. Marijuana has become a booming industry. Just a few years after the start of the legalization process, cannabis companies have earned billions of dollars in value. The potential for future earnings is even greater. Recreational marijuana is only legal in nine states and is already worth $ 10 billion. How much more can it grow if (or when) the other 41 markets open?
However, as we will see below, the cannabis industry has some specific characteristics that make it a particularly risky investment. This makes the risk mitigation of an ETF even more useful when it comes to investing in marijuana. By diversifying your investment, you are protecting yourself against the closure of an individual producer, the modification of its laws by a state or the searches of a particular laboratory that have turned out to be a chimera.
Most ETFs in this market are focused on specific investments in cannabis. However, many companies and investors view marijuana as a diversified investment in recreational substances, usually associated with alcohol and tobacco. For investors, a sector-specific fund will benefit more from the gains in the cannabis market. However, a diversified substance-focused fund will do more to mitigate the risks of investing in a single industry, as well as those related to marijuana.
Risk profile of marijuana
The cannabis industry has two particular risk profiles that investors should consider before embarking on it.
1. Volatility issues
Like cryptocurrency, cannabis is a high risk and very profitable investment.
This market has been inflated by a combination of real value, anticipated profits and absolute enthusiasm. The high degree of emotional investment, in this case where some investors have managed to enrich quickly and others simply enthusiastic about the legalization, makes the market less predictable. Investors will act as much by whim as by metric.
Some individual stocks lost up to 26% in a trading day.
A lot of capital has poured into the cannabis market in a very short time. It's a recipe for significant market corrections and short-term reinvestments … in other words, volatility.
2. Legal issues
Investors in marijuana must be very clear about one fact: marijuana is not legal in the United States.
Many states have decriminalized marijuana, some for recreational purposes and others for medicinal purposes. However, the federal government still prohibits its use and possession. The Department of Justice has decided not to prosecute, but it is a matter of pure discretion. At any time, the Attorney General or the President could change his mind and close all cannabis-related activities in the United States.
Investors should take particular note of this risk in light of the tendency of many Republican politicians to campaign on social issues and appeal to their conservative base.
There is more. Since producers and retailers of recreational marijuana are in violation of federal law, manipulating their money can be characterized as money laundering, depending on the circumstances. While an increasing number of banks are working with cannabis companies, Congress has explicitly refused to protect them from future application. This means that funds and banks take active risk by participating in this market and can choose to opt out at any time.
Only legislation can change that. Without change in laws, the Department of Justice, the Treasury and the Securities and Exchange Commission can at any time take action. This could mean a market disruption until the immediate closure of all marijuana funds.
Key Examples of Marijuana ETFs
While these are not the only funds on the market, or even the ones you should pay the most attention to, these three funds are good examples of the type of ETFs you can consider when you invest in marijuana.
North American Marijuana Index
It is a fund focused on industry and producers. The North American Marijuana Index is a classic cannabis ETF focused on producers and the overall value of the industry.
Teucrium Emerging Medical Agriculture Index Fund
Unlike a producer-driven fund, this all-new ETF intends (in all reports) to focus on the emerging medical cannabis market.
ETFMG Alternative Harvest
This is an example of a diversified fund. While Alternative Harvest (MJ) spends most of its assets on marijuana, it also owns several tobacco companies. Companies do this for a wide variety of reasons, two of which may include counter-cyclical stability and future expectations. If Phillip Morris (PM) decided to expand his smokable products, Alternative Harvest would be ready.
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