The cannabis industry, although relatively new in the investing world, is quickly growing. Market developments, particularly political legislations, play a crucial role in dictating the growth of the industry.
Cannabis has been gaining wider acceptance, particularly in the North American region, and this is expected to continue over the near term at least. For example, many marijuana stocks rallied after the Democrats took control of the US Senate, as there is a higher possibility of cannabis-friendly laws on the federal level. Despite expensive valuations and sustained losses from bellwether companies, investors continue to plough money into this industry. It is important for investors to weed out market noise and assess companies based on their fundamentals and resource allocation.
In the investing universe, cannabis is commonly categorised into marijuana and hemp. Both marijuana and hemp are derived from the same plant, but are differentiated through their applications, cultivation methods and tetrahydrocannabinol (THC) content. THC is a psychoactive chemical responsible for the psychological effects (the feeling of being “high”). Hemp has very low THC content compared to marijuana, and hence this explains the widespread usage of hemp globally compared to marijuana, which is subject to strict legislations across most states and nations (see Table).
Though hemp and marijuana both make up the investable cannabis universe, the latter industry has huge potential to penetrate global consumer and financial markets. Market intelligence indicates that the global legal marijuana market size is expected to grow at a rate of 18.1% CAGR over the next seven years to a value of US$73.6 billion ($97.4 billion), driven by the increasing legalisation of cannabis for medical as well as recreational uses. Pure-marijuana plays cover both medical and recreational marijuana. The value chain of the marijuana industry covers companies that do research and development, distribution and sales of medical and recreational marijuana. Though many of the larger listed marijuana companies are suffering significant losses, they continue to invest in equipment to improve sales growth.
Investors seeking exposure to this potentially lucrative industry could buy into some of the bigger names. However, given that this industry is relatively nascent, it is still subject to a multitude of risks, particularly state legislations and the prevalence of black markets. The alternative here is to buy an exchange traded fund (ETF) comprising marijuana stocks along the value chain. This allows investors to fully tap prospects of a favourable market development, while reducing the risk of being exposed to a single company. It is particularly common in this industry for prices of stocks to go on wild swings from time to time.
Investing in the three largest weed ETFs is the best way to gain exposure to the marijuana value chain, and for investors seeking high-than-average risk. These three ETFs are the ETFMG Alternative Harvest ETF, AdvisorShares Pure Cannabis ETF (YOLO) and Cannabis ETF, all listed on NYSE Arca.
ETFMG Alternative Harvest ETF (MJ) was incorporated in the US in December 2015. This fund tracks the performance of the Prime Alternative Harvest Index, which tracks companies likely to benefit from the increasing global acceptance of various uses of the cannabis plant. MJ is the largest public traded ETF with a market capitalisation of US$1.53 billion, with a 90-day average trading volume of 2.5% of its total shares outstanding. The expense ratio or management fee of the ETF is 0.75%. MJ currently trades at US$19.80 per unit.
MJ rebalances its portfolio quarterly, and has 33 holdings currently. The top three holdings of the ETF are Aphria (12.5%, listed on Nasdaq), Tilray (10.1%, listed on Nasdaq) and Canopy Growth Corp (7.7%, listed on Nasdaq). MJ’s main geographical exposure is to Canada (58.8%), followed by the US (27.5%) and UK (10.6%). The ETF is almost fully invested with 99.7% of its assets in equity and only 0.3% in cash. MJ’s three-month return is 76.5%, while its year-to-date return is a whopping 40.8%. MJ’s dividend yield is currently at 2.0%, with a quarterly dividend frequency. The average dividend yield, price to sales (P/S) and P/B for this ETF’s portfolio of holdings are 1.2%, 4.1 times and 2.5 times respectively.
YOLO was incorporated in the US in April 2019. YOLO invests in equities of US and foreign cannabis-related companies engaging in legal business. YOLO is unique and does not track an index — it is the first actively managed weed ETF. This implies that the ETF can adjust its portfolio more quickly than a passive index-based strategy, and this can be advantageous in a rapidly evolving cannabis marketplace. YOLO’s market capitalisation is US$273.0 million, with a 90-day average trading volume of 2.3% of its total shares outstanding. The expense ratio of the ETF is 0.74%. YOLO currently trades at US$22.06 per unit.
YOLO has 32 holdings in its portfolio. The top three weed-themed holdings of the ETF are Village Farms International (11.5%, listed on Nasdaq), Innovative Industrial Properties (9.3%, listed on the New York Stock Exchange), and GW Pharmaceuticals (7.9%; listed on Nasdaq). YOLO’s main geographical exposure is to the US (48.3%), followed by Canada (28.4%) and the UK (5.4%). The ETF is 56.2% invested in equities and 26.8% in government securities, and holds the rest of the 17.0% in cash. YOLO’s three-month return is 85.3%, while its year-to-date return is a strong 30.2%. YOLO’s dividend yield is currently at 0.7%, with a quarterly dividend frequency. The average dividend yield, P/S and P/B for this ETF’s portfolio of holdings are 0.3%, 8.3 times and 2.9 times respectively.
Cannabis ETF (THCX) is the smallest among the three ETFs, and was incorporated in the US in July 2019. THCX tracks the performance of the Innovation Labs Cannabis Index, which tracks the performance of global companies that have a business interest in the legal cannabis, hemp, or cannabidiol (CBD)-based pharmaceutical, consumer product and wellness markets. THCX’s market capitalisation is US$98.1 million, with a 90-day average trading volume of 2.4% of its total shares outstanding. The expense ratio of the ETF is 0.70%. THCX currently trades at US$17.91 per unit.
THCX rebalances its portfolio monthly, and has 29 holdings currently. The top three holdings of the ETF are Aphria (8.1%; listed on Nasdaq), GrowGeneration Corp (6.7%; listed on Nasdaq) and Tilray (6.4%, listed on Nasdaq). THCX’s main geographical exposure is to Canada (62.8%), followed by the US (32.4%) and UK (4.6%). The ETF is almost fully invested with 99.8% of its assets in equity and only 0.2% in cash. THCX’s three-month return is 88.9%, while its year-to-date return is a high 45.7%. THCX’s dividend yield is currently at 1.1%, with a quarterly dividend frequency. The average P/S and P/B for this ETF’s portfolio of holdings are 1.2%, 4.7 times and 2.9 times respectively.
