MSOS - MJ: Can't Get Off The Ground

2023-10-09 14:48:52 ET

Summary

• Investing in the cannabis industry has been challenging due to volatility and lack of federal banking reform.
• ETFMG Alternative Harvest ETF offers diversified exposure to the cannabis space, but timing is difficult.
• The future of the industry depends on federal standards and progress on legalization, making it uncertain for sustained confidence.

I don't do drugs, though. Just weed. - Dave Chapelle.

Cannabis has been the widow-maker trade over the last couple of years. Despite popular support and ongoing state legalization, investing in the space has been incredibly painful. At some point this will turn, but the timing is incredibly difficult.

When the tide turns, there are funds to try to position into for a recovery. One such fund is the ETFMG Alternative Harvest ETF (MJ). For what it's focused on, it's a good fund to get access to the cannabis space. It's just nearly impossible to time properly because the future of the cannabis sector is clouded by the volatile nature of small-cap cannabis stocks and slowing growth.

ETFMG Alternative Harvest ETF: An Overview

MJ offers a diversified portfolio, investing in companies from various sectors that are engaged in the legal cannabis ecosystem. It's worth noting that MJ's performance seems to have an inverse relationship with the S&P 500 (SP500), and much of this has to do with the difficulty for these companies to gain proper access to the financial system in the absence of federal banking reform.

This is despite the global cannabis market going through meaningful growth, with estimates suggesting it can grow to $70.6B by 2028. There are several applications for cannabis and THC-based medicines, ranging from epilepsy to cancer treatment to non-opioid pain management, offering a broad scope for the industry's growth. The problem despite this remains the difficulty for these stocks to sustainably get off the ground because of the disjointed federal standards (or lack thereof) in the space.

Holding Analysis

MJ's portfolio is diversified across sectors like healthcare, real estate, consumer defensive, and others. It focuses primarily on the U.S. but also invests in other countries like Canada, the United Kingdom, Australia, Israel, and Denmark.

Strengths & Weaknesses

MJ's diversified portfolio across various sectors could provide a level of stability that is not seen in the volatile cannabis industry. The fund's substantial allocation to sectors like healthcare and real estate, which are projected to grow significantly in the coming years, could balance out the poor performance of individual cannabis stocks. Regardless, this diversification within the theme hasn't practically mattered. With stalling federal legalization and increased market competition, these small caps will likely continue to struggle.

Peer Comparison

When compared to other cannabis ETFs, most have been volatile against each other but broadly performed the same. We can see, for example, that looking at the AdvisorShares Pure US Cannabis ETF (MSOS), MJ hasn't done all that much relative to three years ago. From that perspective, it's clear that the macro outlook on federal reform is far more important than individual portfolio positioning.

Final Thoughts

It's crucial to bear in mind that the cannabis industry's future remains uncertain due to its volatile nature and the slowing growth of small-cap cannabis stocks. This is a pass for me here. We need to see much more progress on the federal level for there to be any real sustained confidence in the uptrend, which is continuously fleeting.

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