Investors might consider diversifying their portfolios by adding cannabis exchange-traded funds or stocks, as a growing number of them have billion-dollar market capitalizations.
The cannabis industry is worth more than $50 billion and could easily triple by the end of the decade, says Timothy Seymour, founder of Seymour Asset Management in New York and portfolio manager of Amplify Seymour Cannabis ETF (ticker: CNBS).
As more companies go public in the U.S., investors have more opportunities to gain exposure to different subsectors within the cannabis industry, including technology and ancillary companies, he says. The cannabis sector includes 10 companies in North America with billion-dollar market capitalizations, including U.S. companies at $2 billion to $5 billion. The growth in the industry comes as more institutional investors buy shares and more states have legalized the recreational use of cannabis.
Keep these things in mind when considering cannabis ETFs:
— Actively managed ETFs keep up with a dynamic market.
— Actively managed marijuana ETFs to consider.
— Passively managed ETFs to consider.
[Read: How to Invest in Marijuana]
Actively Managed ETFs Keep Up With a Dynamic Market
“My goal as a portfolio manager for an active ETF is to combine the appropriate exposure for today’s trade with an eye on where the industry is evolving for tomorrow’s trade,” Seymour says.
Marijuana ETFs are one option for investors who do not want to follow the earnings of cannabis companies or federal and state regulatory issues and political dynamics that affect the industry. Since 2019, many cannabis ETFs were approved by the U.S. Securities and Exchange Commission and began trading.
Trading in cannabis stocks can be volatile — some investors want to lower the amount of risk by investing either in actively managed ETFs or those following a benchmark index of stocks.
Actively managing ETFs in the cannabis industry is critical because stock prices can move quickly on news of companies going public, mergers and acquisitions, and downgrades and upgrades on stocks from analysts, Seymour says.
“Rebalancing an ETF three months or even one month later means missing an opportunity,” he says. “The industry is changing quickly with the federal landscape waiting for legalization. As a function of that, companies have different correlations, and an actively traded ETF means you can be proactive in investing in those trends.”
Investors should research what criteria the portfolio managers use for their investment process and trading within an ETF, Seymour says.
Investing in passively managed ETFs in the cannabis industry can be problematic, says Jason Spatafora, co-founder of MarijuanaStocks.com and head trader at True Trading Group. The portfolio managers in actively managed ETFs can take advantage of dips in stock prices and divest companies when there are issues, he says.
Actively Managed Marijuana ETFs to Consider
“I think the best actively managed ETF in cannabis is CNBS,” Spatafora says.
Amplify Seymour Cannabis ETF is actively managed and 80% of the stocks are pure-play cannabis companies and do not include pharmaceutical, tobacco or companies such as Scotts Miracle-Gro Co. ( SMG), which is a fertilizer company with a hydroponics equipment division. The ETF’s largest holdings are Tilray ( TLRY ) at 8.76%, Silver Spike Acquisition Corp. (SSPK) at 7.73% and Village Farms International ( VFF) at 6.11%.
Another actively managed ETF is AdvisorShares Pure US Cannabis ETF ( MSOS) that began trading in September 2020. The fund holds large percentages of the largest multistate operators: Curaleaf Holdings (CURLF) at 12.07%, Green Thumb Industries (GTBIF) at 11.44% and Trulieve Cannabis Corp. (TCNNF) at 10.6%.
MSOS is an ETF that offers exposure to large U.S. cannabis operators. “The trade-off is exposure to the best three companies in the world,” Spatafora says. “The downside is they have some companies in their portfolio that lack the market’s full attention.”
The AdvisorShares Pure Cannabis ETF ( YOLO) began trading on the NYSE Arca in April 2019 and charges an expense ratio of 0.75%. This ETF is actively managed with $378 million in assets. The ETF tracks Canadian and U.S. companies that are in the consumer products, health care and real estate industries. The top three holdings are Village Farms International at 14.76%, Innovative Industrial Properties ( IIPR) at 9.7% and Tilray at 7.1%.
Passively Managed ETFs to Consider
While still offering good returns, stocks are only rebalanced quarterly in passive cannabis ETFs and follow benchmark indices.
The first U.S.-focused marijuana ETF, the Horizons US Marijuana Index ETF (HMUS), began trading in April 2019 in Canada with an expense ratio of 0.85%. The ETF holds 30 U.S. companies and owns 11.4% in Cresco Labs (CRLBF), 10.3% in Curaleaf Holdings and 10.2% in Columbia Care (CCHWF).
The Cannabis ETF ( THCX) began trading in July 2019 and has an expense ratio of 0.7%. The ETF is passively managed and tracks the Innovation Labs Cannabis Index. The ETF only has $20.7 million in assets but provides a dividend yield of 4.1%. The top three holdings are Canadian producer Tilray at 7.5%, Village Farms at 5.7% and Canadian operator Canopy Growth Corp. ( CGC) at 5.03%.
ETFMG Alternative Harvest ETF ( MJ) launched in 2015 and now has $1.6 billion in assets under management. The ETF follows the Prime Alternative Harvest Index and has an expense ratio of 0.75%. The top three holdings as of mid-June are Tilray at 9.34%, GrowGeneration Corp. ( GRWG) at 8% and Canopy Growth Corp. at 7.88%.
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