The marijuana industry’s value continues to rise at a rapid rate. Legal cannabis sales more than tripled between 2014 and 2018, where they reached $10.9 billion. Estimates by ArcView Market Research and BDS Analytics suggest the market could reach $40.6 billion by 2024.
Interestingly, five countries will likely make up over 90% of the global market at that point.
In many people’s eyes, the only tried and trusted method of accumulating wealth is through investment.
This involves having a second income slowly growing as you work hard to boost your primary salary. Through this process, you can produce a substantial nest egg in a surprisingly short period. Investing in the stock market with mutual funds is a prevalent method of trying to boost wealth.
With the growth of the marijuana market, it is hardly a surprise that investors are keeping a keen eye on what’s likely to happen next in the cannabis industry.
In late 2016, there were no cannabis-focus Exchange-Traded Funds (ETFs). That all changed when American Growth Funds (AMREX), a mutual fund, began focusing on the sector and unveiled its Series Two Fund.
This guide provides you with a brief overview of five significant cannabis-related investment funds. It also looks into the ETF markets. However, we must first warn you of the potential dangers of dipping your toes into the marijuana financial sector.
Investing in Marijuana – What Could Go Wrong?
Adding cannabis plays into your financial portfolio means you are likely investing in something offered by a mutual fund. It is a collection of different marijuana stocks. As such, even if the overall market is performing well, your fund could lose a significant sum of money.
The Series Two Fund, for example, came into being at a time when the cannabis market was starting to accelerate its growth. However, a semi-annual report, released in January 2018, revealed that the fund was worth just $895,000. A figure that was far less than what was required merely to cover its expenses! It had yet to exceed the $3 million barrier at the time of writing.
When we initially explored cannabis-related investment funds, the market was enjoying a massive surge. By mid-2018, a significant number of marijuana stocks were rising rapidly. At that time, investors paid more than what shares were realistically worth in the belief the market would continue to proliferate. This state of affairs didn’t last long.
A Recent Change in Fortunes
Even when the cannabis stocks were rising in value, there were concerns over different issues. Continued federal prohibition damaged the markets as investors didn’t like the uncertainty. Even though Canada made cannabis legal, there were concerns over the nation’s ability to produce enough to meet demand. A supply issue could potentially cripple any cannabis funds.
As we mentioned, cannabis stocks soared in mid-2018 for a few months. Tilray, a Canadian marijuana grower, saw a share price increase of over 400% in a matter of months. At the time, the stock boom was primarily empty hype. Tilray’s valuation was around $20 billion at that stage, almost the same as American Airlines (AAL). However, while AAL earned $45 billion in revenue in 2018, Tilray managed just $200 million!
Many industry experts are urging investors to steer clear of cannabis stocks.
There are already a phenomenal number of marijuana growers in America alone. More than there are breweries! As is the case with grocers and farmers, the cannabis market is sure to experience price compression. Also, as far as investors are concerned, marijuana is a commodity. They don’t care if it makes you feel energetic or stoned!
Tilray’s share price plummeted below $30 less than a year after it had exceeded $200. Practically every other cannabis stock followed suit. The aforementioned price compression means cannabis stocks are arguably not a good investment option. However, others will claim that shares are finally ‘value,’ and it is the right time to get involved. WayofLeaf is not an investment expert, and so we can’t – and won’t – make recommendations.
However, we have outlined five possible marijuana investment funds with potential. Nonetheless, make sure you discuss matters with a professional and only invest what you can afford to lose.
One More Thing
So-called Over-the-Counter (OTC) marijuana stocks are risky. All companies listed on major stock exchanges (such as NASDAQ and the New York Stock Exchange) must adhere to strict rules.
This includes the filing of regular financial statements and maintaining minimum market caps. These measures help investors assess the risks associated with stocks. OTC stocks don’t have to meet many of these requirements, and most cannabis-related stocks are of the OTC variety.
1 – Horizon Marijuana Life Sciences (HMMJ)
At one time, Horizon was the world’s largest marijuana ETF fund. It tracks the North American Marijuana Index. Only companies with a market cap of more than $150 million with specific liquidity requirements are eligible for listing in this index. Also, companies must have a daily trading volume of $1 million. It is a requirement that gets rebalanced each quarter.
Incidentally, six companies comprise 65% of the fund’s total assets. It has improved recently but hasn’t produced great results so far. Perhaps it is now undervalued and ready to increase once again? What’s interesting is that investors are not appraised of the fund’s net asset value.
2 – ETFMG Alternative Harvest ETF (MJ)
MJ remains the largest cannabis-related ETF. Investors have found it a volatile fund in recent times. It was the first cannabis ETF listed in the United States and holds almost 40 stocks. 70% of these companies are involved in MMJ and adult-use cannabis. Investors in this fund get a piece of big names such as Cronos and Canopy. However, please note that you’ll pay a management fee of 0.75%, making it one of the most expensive options on the market.
3 – The Cannabis ETF (THCX)
This is perhaps a surprising entry given its relatively low net assets figure. Its goal is to provide results that correspond to the performance of the Innovation Labs Cannabis Index before fees and expenses. Unlike many other funds, The Cannabis ETF is designed for casual investors who want more exposure to the marijuana market.
Initially, this fund had a relative lack of diversification compared to its rivals. At present, seven companies comprise 60% of the total value of this fund.
4 – The Cambria Cannabis ETF (TOKE)
TOKE is another small fund. It is also actively managed, which means the Cambria team looks for the best investments personally. More than 80% of the fund’s holdings are marijuana-related. It includes big players like Charlotte’s Web and Canopy Growth. Investors also gain exposure to Constellation Brands, one of the world’s largest alcohol companies.
5 – Advisor Shares Pure Cannabis ETF (YOLO)
YOLO is another actively managed fund rather than being a cannabis index ETF. It targets companies across numerous marijuana industries, including biotechnology, agriculture, and real estate. It is one of the largest funds around and includes companies like Trulieve Cannabis and Village Farms International. Four companies make up over half of its holdings.
What Are the Risks Associated with Marijuana ETFs?
There is little question that investing in marijuana stocks or exchange-traded funds carries numerous risks. Here are a few of the most prominent.
The Hype Over Cannabis Stocks Outweighs Performance
One suggestion is that cannabis stock prices have reached the bottom. Therefore, a rise in share prices is inevitable.
Cannabis stocks mainly enjoyed a good spell of growth from mid-2017 to approximately March or April 2019. This boom was primarily hype, and soon enough, many investors started to realize that marijuana is just a crop.
Canopy Growth is a market leader, and its share price was over C$67 at its peak. However, the value of Canopy stock plunged to C$15 in March 2020. A renaissance of sorts followed this as shares exceeded C$42 in January 2021. Yet another sharp downturn followed, and it is hard to say when, or even if, the price will return to record high levels.
As you saw with the funds we’ve already outlined, those who invest in marijuana must accept that volatility is par for the course. The United States Marijuana Index tracks the leading stocks in the industry. A glance is all you need to see the enormous peaks and troughs experienced by investors to date.
In March 2019, the Index reached over 134. Within a year, that figure plummeted to 23. Then it skyrocketed to a new high of around 145 by February 2021 before falling below 105 by the end of July 2021. To date, the Index is characterized by extreme highs and lows, and there is no sign this will change anytime soon.
Limited International Expansion
Proponents of marijuana suggest that there are a vast number of strains and products available. As a result, the market should continue to expand. However, this doesn’t take into account that it is just another commodity. Like fruit and vegetables, for example, personal tastes dictate what people buy.
While MMJ is legal in several countries, only Uruguay and Canada allow adult use across the country. Mexico may follow suit shortly. However, the continuing problems with legality are sure to put a cap on international growth.
The Fundamental & Technical Data Doesn’t Bode Well
A savvy investor always looks at the data and decides without emotion. At present, despite the seemingly massive growth, the marijuana industry is losing money at an alarming rate. The rapid expansion means producers are burning through their cash in a bid to keep up. Big firms often have cash problems and need every dollar of the money at their disposal.
Although companies like Canopy Growth expect to see a profit at some point, it hasn’t yet happened.
If you go through these firms’ books and calculate some of the values we mentioned earlier, they don’t look like value investments. For example, even the biggest companies tend to have low Earnings Per Share (EPS) ratings. Both Tilray and Canopy Growth routinely have EPS ratings of 30 or below. For reference, the max level is 99.
According to IBD research, you should not invest in stocks with a Composite Rating (on the major U.S. stock exchanges) of under 90. In case you were wondering, this rating is a combination of the following five IBD ratings:
- Relative Price Strength
- Sales + Margins + ROE
- Industry Group Rating
Once again, most cannabis companies perform poorly, with Composite Ratings below 10 in some cases! Hardly any of them ever exceed 50, let alone get near 90.
Legality & Regulation
At present, marijuana remains a federally illegal substance. Despite the legalization of MMJ in most states, it seems unlikely that the end of national prohibition is coming anytime soon. Therefore, at present, marijuana is only legal in select states, and transporting it across state lines remains illegal. As long as this uncertainty remains, investors will exercise caution, thus preventing the market from truly growing.
Financing & Banking
As cannabis is federally illegal, the financial sector wants little to do with companies involved in the marijuana industry. A bank can lose its license for taking on a cannabis company as a client. Therefore, it is exceedingly difficult for marijuana businesses to get loans. There are some merchants working outside the mainstream willing to get involved and offer banking solutions. However, they are few in number and tend to charge high fees.
The Secure and Fair Enforcement (SAFE) Banking Act would be a game-changer if it ever becomes law. However, although the House initially passed it in September 2019, the bill didn’t get any further. It was reintroduced in March 2021 but has yet to get past the Committees of Jurisdiction.
If passed, the SAFE Banking Act would protect financial institutions from federal punishment for providing loans, accounts, or assistance to cannabis businesses. With no threat of liability or forfeiture action, banks would become more likely to get involved with marijuana.
Final Thoughts – Is It a Good Idea to Invest in a Marijuana Mutual Fund?
As much as we would like to say ‘yes,’ there is still too much uncertainty and volatility. The underlying problems surrounding the marijuana industry mean that in the main, cannabis stocks’ fundamentals remain weak. Even the top-rated companies have low rankings for important metrics such as EPS Rating and Composite rating.
There was a massive boom followed by a slump from late 2018 to early 2020. A recovery followed this over the next year before a further market correction. Prospective cannabis investors have to determine whether existing stocks are underpriced or if the current downturn isn’t yet finished.
Please remember that marijuana is a commodity, which means its market is likely to go through boom-and-bust spells, just as with any other investment.
As with any financial decision, do your research and only invest what you can afford.