PSDN - A Close Look At 13 Cannabis ETFs

Summary

• Cannabis ETFs began to hit the market in 2017.
• As cannabis stocks have declined, they have lost their popularity.
• I review the small universe and find none that seem worthy of investment. Investors that want to invest in cannabis can do better picking stocks in my view.

Almost six years ago, in April of 2017, the Mirae Asset in Canada launched the first ETF for the cannabis sector. Now known as Horizons Marijuana Life Sciences Index ETF (HMLSF)(HMMJ:CA), the first ETF has fared poorly in absolute terms, losing 13.8% on a total return basis through the end of January.

There are now many ETFs investing in cannabis stocks, and I look at them in depth here. Unfortunately, none seem like a great deal for investors.

Cannabis ETF Universe

Using the ETF websites and YCharts, I compiled this table:

The YTD performance is not very good so far, with all of the ETFs trailing the New Cannabis Ventures Global Cannabis Stock Index , which has rallied 9.1%. The average return has been just 1.7%, which trails the S&P 500's year-to-date return thus far of 6.2%.

The size of most of these is very small, and many don't have an index.

A Look at the ETFs by Management Firm

AdvisorShares offers 4 ETFs, the largest of which is AdvisorShares Pure US Cannabis ETF ( MSOS ). It offers a leveraged version, AdvisorShares MSOS 2x Daily ETF ( MSOX ), another leveraged ETF, AdvisorShares Poseidon Dynamic Cannabis ETF ( PSDN ) and AdvisorShares Pure Cannabis ETF ( YOLO ). MSOS is the largest cannabis ETF, but, as I described three months ago, the ETF is extremely concentrated in its top holdings . In fact, the amount in the top 5 holdings has increased from 75% to over 77% since then. MSOX, which leverages a poorly constructed fund, has a low amount invested and is a really bad idea in my view. Investors who want to leverage the ETFs can do so on their own through margin. I am a big fan of the folks at Poseidon, but their ETF, which is tiny, had this same leverage issue until it changed its practice near the end of 2022. Finally, YOLO has 36% of the ETF invested in MSOS.

Amplify has partnered with Tim Seymour to offer Amplify Seymour Cannabis ETF ( CNBS ). Seymour, a CNBC analyst and commentator, is well qualified to run the ETF in my view, though it is too small for me to have confidence in it yet. I suggested in that November article that MSOS owners consider swapping into CNBS, which has worked out well:

AXS Investments offers AXS Cannabis ETF ( THCX ), a passive ETF with 26 holdings. Some of the names don't appear to be cannabis-related. The fund was formerly managed by Spinnaker.

Cambria has a single ETF for the sector, the Cambria Cannabis ETF ( TOKE ). The largest holding is Constellation Brands ( STZ ), which isn't a cannabis company. Altria ( MO ) and Philip Morris ( PM ) are other large holdings that aren't a cannabis company. There are no direct American cannabis operators held.

ETFMG Managers Group has a large one, ETFMG Alternative Harvest ETF ( MJ ) and another, ETFMG U.S. Alternative Harvest ETF ( MJUS ). MJ was converted near the end of 2017 from Tierra XP Latin American Real Estate ETF, and it holds 37 names, including almost all of MJUS. The ETF returned -60.2% in 2021.

Global X, another unit of Mirae Asset, offers Global X Cannabis ETF ( POTX ), which is the only NASDAQ-listed ETF. The fund is very heavily weighted towards Canadian companies at about 64% currently. It holds no MSOs due to their not trading on a higher exchange.

Horizons, the firm offering the first cannabis sector ETF, now has just one other fund, Horizons US Marijuana Index ETF (HMLSF), which is very small. These funds as well as the derivative funds the firm offers are available in the Canadian currency, though there is a U.S. dollar version of each of these that trade very thinly.

Roundhill Investments offers The Roundhill Cannabis ETF ( WEED ), which I criticized in the weekly newsletter at New Cannabis Ventures in October, calling it part of the worst way to invest in cannabis . The ETF holds six MSOs, with 60% in the top two.

Conclusion

I think that cannabis stocks are very attractively valued currently and believe that they will generate big returns in 2023 and beyond. I understand why investors like ETFs, but I find that the cannabis ETFs aren't a great option to participate well in the gains that I envision in the sector. Many of them have low funds under management (only 2 are above US$100 million), and some have had terrible performance historically. I am not a big fan of the extreme concentration in the largest ETF, which holds over 77% in the top 5 holdings, and some of these are leveraged or have been so in the past, which I think is unnecessary. Some have no index, which I find unacceptable.

For investors who want to take advantage of the low valuations in the cannabis sector, buying cannabis stocks rather than ETFs makes sense.

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