Cannabis ETFs offer options for betting on 2023 catalysts.
Cannabis stocks haven’t had a great year, to say the least. The New Cannabis Ventures Global Cannabis Stock Index has lost about 68% this year as of Dec. 15 amid the broader market slump caused by inflation, higher interest rates and recession fears. But cannabis stocks were underperforming even before that after Democratic political gains in 2020 and 2021 failed to produce meaningful federal legislative reform, leaving U.S. marijuana companies to face tax issues, banking hassles and uncertainty under federal illegality. But this slump also means marijuana stocks are cheap at the moment, and potential catalysts in 2023 could make now a good time to consider these seven marijuana exchange-traded funds, or ETFs.
AdvisorShares Pure US Cannabis ETF (ticker: MSOS)
One reason ETFs have become so popular is that they offer one-stop shopping for exposure to multiple companies. Underperformance from one company suffering issues specific to it can be offset by gains or at least less underperformance in a fund’s other holdings. MSOS is the most popular marijuana ETF listed on U.S. exchanges, and the actively managed fund has about $560 million in assets under management, or AUM. MSOS doesn’t hold stocks directly. Rather, the ETF opts for synthetic exposure via total return swaps, which are derivatives contracts where a party exchanges cash collateral with another for the returns of an asset. MSOS uses swaps because federal and custodial banks restrict ETFs from investing in U.S. cannabis companies directly. The ETF has an expense ratio of 0.80%.
AdvisorShares Pure Cannabis ETF (YOLO)
ETFs can also offer geographic diversification in addition to company-specific diversification. As the globally diversified version of MSOS, actively managed YOLO has holdings from Canada, the U.K. and Israel. It holds some stocks outright but also uses swaps, and it holds part of its allocation in MSOS, which is focused on the U.S. “With at least two additional states expected to legalize marijuana in 2023, and with recent legalization legislation being introduced in Germany, revenue growth should remain positive as the size of the cannabis market continues to grow both domestically and internationally,” says Jason Wilson, cannabis research and banking expert at ETF Managers Group. YOLO has an expense ratio of 0.88%.
Cambria Cannabis ETF (TOKE)
One choice investors have when picking ETFs is whether they are actively or passively managed. Passive management means the fund tracks an industry index. Active management means that the fund’s managers pick stocks based on their view of company fundamentals and market factors, and they decide what percentage of the fund those stocks should make up. TOKE is actively managed, with its leadership expecting to invest in cannabis companies across micro-, small- and mid-capitalization stocks. In this fund, you’ll find mid-cap stocks that aren’t pure-play cannabis companies. One benefit of this is that these companies offer stability, but they might not get as big of a move as pure-play cannabis companies if the industry rallies. Another downside is that TOKE has only about $15 million in AUM, making it less liquid than some investors would like. TOKE has a net expense ratio of 0.42%.
ETFMG Alternative Harvest ETF (MJ)
This fund is passively managed, tracking the Prime Alternative Harvest Index, which is made up of globally listed cannabis companies that could benefit from medicinal and recreational marijuana legalization initiatives. Roy Bingham, CEO of cannabis data company BDSA, doesn’t expect full federal legalization anytime soon but says there is the possibility of incremental reforms in 2023. One of those could be the SAFE Banking Act, which “would greatly impact the profitability of legal cannabis businesses by easing restrictions on banking access,” Bingham says. With an inception date of Dec. 3, 2015, MJ has been around for a while and has more than $360 million in AUM. The ETF charges an expense ratio of 0.75%.
Amplify Seymour Cannabis ETF (CNBS)
There are “decent odds” that the SAFE Banking Act will pass because federal reform has added urgency among Democrats, as the Republicans will have control of the House in 2023, Wilson says. Additionally, if a federal review of marijuana’s classification under the Controlled Substances Act results in the drug being downgraded or descheduled, that would resolve tax issues and “materially increase the earnings quality of many cannabis companies operating in the U.S.,” Wilson says. “Reclassification is also expected to bring new investors to the industry,” he adds. Like MSOS, actively managed CNBS uses swaps to circumvent federal regulations against the holding of U.S. marijuana stocks by ETFs. CNBS has relatively small AUM of about $38 million and an expense ratio of 0.75%.
The Cannabis ETF (THCX)
Assuming we see the expected level of reform in 2023, U.S. cannabis companies should start trading on primary exchanges in Canada and/or the U.S., Wilson says. “This combination of up-listing, increased earnings quality and new investor demand should result in cannabis companies trading at higher multiples relative to 2022.” Currently, U.S.-based companies directly involved with marijuana cultivation and distribution can’t list on major U.S. or Canadian stock exchanges because the plant is federally illegal in the U.S. Actively managed THCX offers a pure-play marijuana fund by avoiding allocations to alcohol and tobacco companies that only dabble in the cannabis industry. The fund has light AUM of $25.5 million and an expense ratio of 0.75%.
Global X Cannabis ETF (POTX)
Even though pot remains federally illegal, the state-level push for legalization should continue in 2023. “Two states likely to legalize adult use in 2023 are Pennsylvania, where chances of legalization are bolstered by a new pro-reform governor and Democratic state house; and Minnesota, where pro-cannabis state senators have signaled that legalization will be a priority,” Bingham says. Enter POTX, a passively managed fund that tracks the Cannabis Index. POTX doesn’t restrict itself to just producers and distributors of cannabis. The fund also holds companies that provide financial and operational support services to the cannabis industry, as well as pharmaceutical companies that produce cannabis extracts, derivatives or synthetics. The fund has an expense ratio of 0.5%.
7 best marijuana ETFs to buy in 2023:
— AdvisorShares Pure US Cannabis ETF (MSOS)
— AdvisorShares Pure Cannabis ETF (YOLO)
— Cambria Cannabis ETF (TOKE)
— ETFMG Alternative Harvest ETF (MJ)
— Amplify Seymour Cannabis ETF (CNBS)
— The Cannabis ETF (THCX)
— Global X Cannabis ETF (POTX)
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Update 12/16/22: This story was published at an earlier date and has been updated with new information.