Aside from cryptocurrencies, there really hasn’t been a hotter investment in recent memory than marijuana stocks. Even with a valuation cooldown in recent weeks, most pot stocks have catapulted higher by 100% to 200% over the trailing year and are up considerably more since 2016 begin.
The reasons for this rapid appreciation in share price appear to boil down to sales growth and consumer opinion. ArcView, a leading cannabis research company, is estimating that sales growth in North America could average 26% annually between 2016 and 2021. If correct, this would imply close to $22 billion in annual legal North American weed sales by 2021.
Meanwhile, support for legalization among the public continues to climb. There have been five nationally recognized polls in the U.S. since April 2017 that’ve shown support for recreational legalization of between 59% and 64%. The 64% was from Gallup, which has measured the public’s perception on cannabis for nearly five decades, and it represented an all-time high.
The marijuana industry varies greatly, depending on the country
The marijuana industry is very different from country to country. In the U.S., despite rapid sales growth and 29 states that have legalized in some capacity, the environment is highly restrictive. Marijuana firmly remains a Schedule I substance, meaning it’s wholly illegal, highly prone to abuse, and deemed to have no recognized medical benefits. Furthermore, Attorney General Jeff Sessions is doing everything in his power to constrain the expansion of the industry.
On the other hand, Canada has laid out a blueprint for weed progressivism. It legalized medicinal cannabis back in 2001, with Health Canada overseeing the licensing of the industry ever since. More recently, it’s been working through legislation that could legalize recreational pot, making it only the second country in the world to do so. By this coming August or September, adults in Canada could be legally buying weed.
This legalization could bring billions of dollars in added revenue to the industry, which clearly has a lot of investors excited. Of course, investing in marijuana stocks still comes with a smorgasbord of risks, which typically encourages investors who choose to dabble in pot stocks to diversify. The easiest way to do so is through exchange-traded funds (ETFs), and it just so happens a new marijuana-based one recently hit the market in Toronto.
Say hello to the newest marijuana ETF
On Feb. 12, the Evolve Marijuana ETF (TSX:SEED) began trading in Toronto. Occasionally, Toronto-listed ETFs become available for trading on the over-the-counter boards for U.S. investors, although that hasn’t happened as of yet. I’d give it a few weeks, then check again.
The Evolve Marijuana ETF joins around a dozen ETFs offered by Evolve. More importantly, it gives investors another way to diversify their holdings when investing in a highly volatile, and still partially illegal, industry.
As of Feb. 16, the Evolve Marijuana ETF had 26 holdings, albeit its top five holdings comprised half of its weighting, and its top 10 holdings equaled nearly 74% of its weighting. Interestingly enough, eight of the top 10 holdings are cannabis growers, with one royalty company and one cannabis investment firm in the mix.
The Evolve Marijuana ETF does share similarities with the Horizons Marijuana Life Sciences ETF (TSX:HMMJ)(NASDAQOTH:HMLSF), the first-to-market cannabis ETF that debuted last year. Both have modestly high expense ratios, as is to be expected of the unique niche they occupy, and both have diversified into well over two dozen pot stocks.
However, one pretty sizable difference between the two is that the Evolve Marijuana ETF is almost entirely focused on Canada, whereas the Horizons Marijuana Life Sciences ETF includes far more U.S.-based cannabinoid drug developers. The Evolve Marijuana ETF has 91.6% of its assets invested in Canada as of Feb. 16. That’s a highly leveraged bet that Canada will legalize this summer, demand will be enormous, and Canadian growers will benefit from exporting to legal medical markets as well.
Two major risks to the Evolve Marijuana ETF
Early investors in the Horizons Marijuana Life Sciences ETF went through a rough patch, but have done quite well since inception. But that doesn’t necessarily mean the Evolve Marijuana ETF will have the same success. There are two risks to be wary of.
First, liquidity could be a bit of a concern in the early going. According to the latest update, just $1.44 million is currently being managed in the Evolve Marijuana ETF, which doesn’t give the portfolio managers much room to maneuver by adding new positions, diversifying, and averaging up or down. Admittedly, the fund is just a few days old, so I might be harping on its lack of assets under management a bit prematurely. Nevertheless, without ample investments and interest, this ETF may not last very long.
Second, and perhaps even more worrisome, is that the fund is intricately tied to the fate of the Canadian market. Though there’s no debating that Canada has been the blueprint of cannabis success up to this point, putting 91.6% of its weighting behind a single country may not be the type of diversification some investors are after. If so much as a hiccup occurs in that country, such as the recent delay in legalizing recreational weed, it could hit investors in this ETF just as hard as if they were invested in one or a small handful of Canadian pot stocks.
While I’d certainly suggest putting this new cannabis ETF on your watchlist, it’s probably not worth your investment dollars for the time being.
credit:fool.com
