By investing in a cannabis ETF, investors can gain entry into the cannabis space without committing to one specific stock. This fact greatly reduces risk, and, in a volatile market place, that is especially appealing.
At the time of writing, there are five active cannabis ETFs available to buy. It was always inevitable that ETFs would be created for the cannabis industry. As this industry grew, it was simply a matter of time before exchange-traded funds (ETFs) appeared.
In this article, we're going to look at the leading cannabis ETFs and, further, the reasons investors may favor this avenue of cannabis investment.
What is a Cannabis ETF and Why Use One?
Yes, backing the right stock in the multi-billion dollar cannabis industry can return sizeable profits, but it is increasingly difficult to find the right stock. As such, the risk is (potentially) as great as the reward. Choosing carefully is everything in this game.
But a cannabis ETF obviates the need to back just one company. An ETF holds a myriad of different stocks or assets, so by investing in a cannabis ETF, your money is, effectively, backing all the assets that ETF has. This means the potential for profit from the growth of the sector is great and the risk of losing it all to one company is lessened.
This is one major reason investors (especially those who aren't sure where to put their money) might feel more comfortable investing in a cannabis ETF than in individual stocks.
Of course, there are things to consider. The flip side is that an ETF guarantees performance that won't be as strong as the best stock on the market. Investors will need to ask themselves the following: Do I want to make bigger gains but have a higher risk? Or do I want to make steady, gradual gains at a reduced risk?
If you'd rather the latter, then a cannabis ETF may be for you.
Another reason to invest in a cannabis ETF is professional guidance. According to Cabot Wealth:
"If you want to make money in the sector, the best time to buy is when stocks are down, and that’s difficult without professional guidance—which is one reason to invest in ETFs instead."
Run by professional investors and industry experts, the team behind an ETF has a strong chance of picking the industry gainers. Individual investors can be misled by short-term spikes or hype-led gains, suffering from long-term pitfalls as a result.
In short, if you are not confident in investing in the cannabis stock market, then backing a cannabis ETF takes the pressure off. And, don't forget, the marijuana industry is young—very few can say they are truly confident.
Which Cannabis ETF Should You Choose?
As we've covered, there are very strong reasons to invest in a cannabis ETF rather than one specific company. But which ETF is the best one to use?
The cannabis market is explosive, so up first on our list is the pioneering US cannabis ETF: the MJ ETF.
ETFMG Alternative Harvest ETF (NYSE:MJ)
MJ is the first cannabis-focused ETF to trade in the US. The fund follows 30 stocks that are "reconstituted and rebalanced quarterly."
Its main body of tracked stocks is engaged in the legal cultivation, production, marketing, and/or distribution of cannabis. But there are also some stocks that are not directly related to the cannabis industry, such as tobacco companies. It's most likely that these are on the index for their potential movement into the cannabis space.
With an index covering both medical and non-medical cannabis companies, the MJ ETF is global and launched over a year ago. Run by Managers Group, it has an expense ratio of 0.75%, which is the payment investors give to management to run the ETF.
Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) (OTC:HMLSF)
Horizons is a Canadian firm with a portfolio of roughly 90 ETFs. Its cannabis ETF "tries to duplicate the returns of the North American Medical Marijuana Index." This means it includes companies from Canada and the US but also Great Britain (though obviously not in North America).
Running since April 2017, 38% of the Horizons ETF portfolio is made up of the five largest growers in Canada. Focusing solely on the cannabis industry, this one does not have any tobacco stocks.
The index crossed the $1 billion CAD mark in assets under management in the fund last September.
The Horizons Marijuana Life Sciences Index ETF has an expense ration of 0.75%. However, if you reside in the US, the price is higher.
Evolve Marijuana ETF (TSX:SEED)
Launched in February 2018, the Evolve ETF has 25 cannabis stocks in its holdings list.
Just recently, the Canadian ETF announced that it was one of the best-performing cannabis ETFs, with SEED returning a 48.48% in the year prior.
According to the press release:
"The Evolve Marijuana ETF [...] is designed to provide Canadian investors with long-term capital appreciation by investing in a diversified mix of equity securities of issuers that are involved in the marijuana industry."
The ETF has the cheapest expense ratio on offer, at only 0.64%.
Teucrium Emerging Medical Agriculture Index Fund (MEDA)
Though not open yet, Teucrium ETF has a new cannabis ETF on the way. Called the Emerging Medical Agriculture Index Fund, this ETF will own stocks in the medical marijuana space.
The group already runs five future-based ETFs focused on commodities: corn, soybeans, sugar, wheat, and a combination of the four.
Although it has yet to open, the ETF is filed and, according to the prospectus, holdings include biotechnology firms involved in medical cannabis and firms that invest in such businesses, along with companies that provide growing technologies and equipment, like hydroponic technologies.
Down-the-line this cannabis ETF may also invest in secondary cannabis services such as real estate and finance.
The expense ratio for Teucrium's current portfolios is quite high: corn at 2.66%, soybeans at 2.63%, sugar at 1.73%, and wheat at 2.54%. The combination ETF is 0.48%, but that’s on top of the other ETFs' expenses. Baring those expenses in mind, it's likely that the Emerging Medical Agriculture Index Fund will also have top-end management fees.
As the cannabis industry grows, so will the number of ETFs. As stated, investment here reduces risk but may not deliver jackpot gains. The decision lies with every investor, so research is imperative when choosing the best cannabis ETF for you!
Featured image: DepositPhotos © zimmytws