ETF Archives - Green Market Report

Debra BorchardtJuly 8, 2021
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4min10600

Cannabis stocks have taken a beating in the second quarter, so investors are hoping that valuations will recover in the back half of the year. In exclusive comments to Green Market Report, Jason Wilson, cannabis banking and research expert at ETFMG (NYSE: MJ), which issues the ETFMG Alternative Harvest exchange-traded fund, has given his opinion about the industry for the rest of 2021. The comments are overwhelmingly positive. Despite the downturn in stock valuations, the MJ cannabis ETF has seen a return for the first six months of 2021 that has exceeded 40%.

“Several factors have been driving cannabis sales over the last few years: the size of the total addressable market has expanded as more states and countries move to legalize cannabis; the number of consumers has increased in existing markets as canna-curious customers transition to cannabis products, and transaction volume among existing customers in established markets has increased as the number of dispensaries has grown and buying experiences have improved,” said Wilson. He noted that the market has been expanding at a rate of 30% every year.

“There has been some speculation that the recent growth in the cannabis market has been fuelled by the pandemic, leading some to suggest that 2021 might not experience the sales growth of years past, but so far, as the economy starts to recover and emerge from COVID-19, the trend of strong sales growth has continued in 2021. In the U.S., mature markets such as Colorado, Oregon, and Washington state are averaging 26% year-over-year sales growth while newer markets such as Illinois, Massachusetts, Michigan and Pennsylvania are averaging 136% year-over-year sales growth. The story has been similar in Canada where 2021 Q1 sales exceeded 2020 Q1 sales by approximately 70%,” he added.

There are many positive catalysts to support continued growth. While 18 states have legalized the sale of adult-use cannabis, the actual sale of recreational cannabis has only begun in 11 states. New Jersey could begin sales in 2021, while New York is slated to begin sales in April 2022. These are expected to be two of the largest markets in the industry. In addition to these two, New Mexico is on deck to begin its adult-use sales in April 2022 as well.

The industry has managed to persevere even though it has been subjected to numerous hurdles like a lack of banking and credit card processing, unfair taxation and sometimes expensive capital. Wilson though believes that with voter support for federal legalization initiatives at an all-time high, combined with the positive economic impact cannabis legalization would provide through job creation and increased tax revenues (it has been estimated that the total U.S. economic impact will reach $92 billion in 2021), it is widely anticipated that the current administration will have enough momentum to pass federal legislation that provides meaningful cannabis reform.

He concluded, “So while the current challenges and headwinds have created significant volatility for investors to date, it appears that the catalysts remain in place for the domestic and global cannabis markets to continue to expand at a significant pace for the foreseeable future.”

 


StaffJuly 7, 2021
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6min8040

Canadian-based Horizons ETFs Management Inc. has completed the quarterly rebalances of the holdings of the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ) and the Horizons US Marijuana Index ETF (NEO: HMUS). HMMJ is an index (or passively managed) ETF, which seeks to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. The North American Marijuana Index selects from a current universe of companies that have operations that may include one or more offerings of biopharmaceuticals, medical manufacturing, distribution, bio-products, and other ancillary businesses related to the marijuana industry.

Marijuana Life Sciences Index

This quarter, 3 companies were added to HMMJ’s portfolio:

Company Name Ticker Exchange
Inner Spirit Holdings Ltd. ISH CSE
Tetra Bio-Pharma Inc. TBP TSX
Jazz Pharmaceuticals PLC JAZZ NASDAQ

 

“The performance of HMMJ was more volatile during the second quarter of 2021, this reflected more the fact that the sector had reached such lofty valuations after a very strong start to the year. Year-to-date, the sector is still up more than 30%,” said Steve Hawkins, President, and CEO of Horizons ETFs. “The recent pullback in valuations seems to have sparked a new round of mergers, consolidations and partnerships in the sector as more publically listed companies look to increase their scale in order to compete in the growing global market.”
US Marijuana Companies Index

HMUS is the world’s first U.S.-focused marijuana index ETF. HMUS seeks to replicate, to the extent possible, the performance of the US Marijuana Companies Index, net of expenses. This index, which also rebalances quarterly, has been designed to provide exposure to the performance of a basket of publicly listed companies with significant business activities in, or significant exposure to, the marijuana or hemp industries in the United States. Constituents of this index are selected from Canadian and U.S. exchanges.

This rebalance resulted in 9 companies added to the HMUS portfolio:

Company Name Ticker Exchange
Ascend Wellness Holdings AAWH/U CSE
AFC Gamma Inc. AFCG NASDAQ
Chalice Brands Ltd. CHAL CSE
Captor Capital Corp. CPTR CSE
Flora Growth Corp. FLGC NASDAQ
Gage Growth Corp. GAGE CSE
Hollister Biosciences Inc. HOLL CSE
Lowell Farms Inc. LOWL CSE
Verano Holdings Corp. VRNO CSE

“Halfway into 2021, we’re seeing increased momentum in the U.S. for marijuana liberalization, both from a grassroots level and recently, from major companies and policy influencers,” said Mr. Hawkins. “Connecticut, the most recent state to legalize recreational marijuana, became the 19th state to do so, edging the country closer to a ‘pro-cannabis majority’. Now, Amazon, the country’s largest private employer, has signaled its intent to support the MORE Act and will no longer assess employees for marijuana use on drug tests. These are important milestones that are opening the door for broader federal marijuana reform in the country.”


StaffMay 13, 2021
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3min27090

ETF Managers Group has launched its latest cannabis ETF (exchange-traded fund) that will once again focus on the cannabis U.S. stocks. The ETFMG U.S. Alternative Harvest ETF (NYSE Arca: MJUS) will begin trading today on the New York Stock Exchange. The company said that the MJUS offers investors exposure to cannabis companies operating in the United States, including multi-state operators (MSOs) directly involved in the cultivation, production, marketing, and distribution of cannabis or cannabis-related products.

 U.S. cannabis single and multi-state operators are currently only available to investors through second-tier, foreign exchanges, which are not widely accessible through U.S. brokerages. This is why U.S.-focused ETFs have proven to be so popular. The ETFMG Alternative Harvest ETF (NYSE Arca: MJ), which debuted in December 2017, has nearly $1.7 Billion assets under management. MJUS seeks to achieve its investment objective by investing in cannabis companies within the Prime U.S. Alternative Harvest Index that derive at least 50% of their net revenue in the United States and in derivatives that have economic characteristics similar to such securities.

 “We are especially proud to be bringing yet another cannabis product to investors, specifically an ETF that captures one of the greatest untapped areas of growth potential in the industry,” says Sam Masucci, founder, and CEO of ETFMG.

As the largest cannabis market globally, legal cannabis sales in the U.S. exceeded $17.5 billion in 2020, representing a 46% increase over 2019’s $12.1 billion of sales. With several factors driving growth in the U.S., including more states legalizing cannabis and more consumers entering the market in existing legal markets, the rapid expansion of the U.S. cannabis industry is expected to continue and ultimately generate $85 billion in sales by 2030.

“With voter support for federal legalization initiatives at an all-time high, combined with the positive economic impact cannabis legalization would provide through job creation and increased tax revenues, it is widely anticipated that the current administration will pass federal legislation providing meaningful cannabis reform, which would greatly benefit existing U.S. cannabis-related businesses,” says Jason Wilson, ETFMG Cannabis Research and Banking Expert.


Debra BorchardtJanuary 25, 2021
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8min30411

This week the first psychedelic stock ETF (exchange-traded fund) will begin trading on the Canadian NEO exchange under the ticker PSYK on January 27. The base currency will be Canadian dollars. The ETF will be managed by Canadian financial services company Horizons ETF Management and it will be focused on the emerging psychedelics opportunity led by life science and pharmaceutical companies. Horizons noted that a growing body of clinical research has demonstrated the potential use of psychedelic compounds, such as psilocybin and ketamine, as treatment for mental illness, depression, addiction, post-traumatic stress disorder (PTSD), and other medical conditions. As a result, there is a growing number of public companies listed in North America that are focused on the development of therapeutic solutions using psychedelics.

Horizons said that PSYK will seek to replicate the performance of a market index that is “designed to provide exposure to the performance of a basket of North American publicly-listed life sciences companies having significant business activities in, or significant exposure to, the psychedelics industry. PSYK will be using the North American Psychedelics Index as its market index. The Index is a proprietary index owned and operated by Horizons ETFs, and Solactive AG is the independent calculation agent for the Index.”

“After decades of restrictions, recent policy changes and exemptions in Canada and the United States have allowed for increased research in the therapeutic application of psychedelic compounds, and the potential to create an entirely new marketplace for drugs derived from psychedelics,” said Steve Hawkins, President, and CEO of Horizons ETFs. “PSYK will give investors exposure to the leading public companies undertaking this important research and development of treatments for the more than 700 million people globally that, according to the World Health Organization, suffer from some sort of mental illness, addiction or eating disorder.”

Companies In The ETF

A total of 17 North American life sciences companies have been included in the initial ETF portfolio. These companies form part of the North American Psychedelics Index, provided by German index provider Solactive, which underlies the PSYK ETF. They are:

Management Comments

Tim Moore, CEO of Havn Life said in a statement,  “Our team is excited to be included in Horizons Psychedelics ETF, which will allow Havn Life to become visible to and available to a wider investment community. This is an opportunity to provide added shareholder value as we continue to execute our operational milestones.”

“We are honoured to be selected as part of the first-ever Psychedelic ETF. This is a milestone moment for our industry and for MINDCURE, as we continue to explore, develop and commercialize products to give hope and healing to a world in pain and suffering from a mental health crisis. This solidifies our position amongst peers and gives investors a great opportunity to support our industry as a whole,” said Kelsey Ramsden, President & CEO, MINDCURE. “We congratulate our peers and believe it is a privilege to build a new category of care and investment together.”

“While medicinal psychedelics are certainly not new, the legal market and the ability to invest in these cutting-edge companies certainly is new,” said Joshua Bartch, Co-Founder & CEO, Mydecine in a company statement. “Together, with these 17 companies, Mydecine is helping to build an industry that is investing in and researching innovative solutions for treating previously untreatable mental illness. We are honored that we are included, and we are also mindful that this now gives more people, who may be new to the space, the ability to access and diversify their investments. By having exposure to many different companies with solid fundamentals, but different approaches, philosophies, indications, and technologies, is healthy for investors in the industry.”

“We launched the world’s first Cannabis-focused ETF in 2017, the Horizons Marijuana Life Sciences Index ETF (HMMJ), and we see many similarities between that industry in 2017 when it was in its infancy to the psychedelics industry now. We see the potential for significant growth from this new sector like what we have witnessed with the Cannabis industry during the last few years.” said Mr. Hawkins. “At Horizons ETFs we strive to be at the forefront of key global transformative investment themes. We believe the opportunities with psychedelics not only provide a compelling investment case, but also the potential to provide life-changing impact for those suffering with mental illness.”


StaffSeptember 2, 2020
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4min13100

AdvisorShares has launched the AdvisorShares Pure US Cannabis ETF (Ticker: MSOS), which will begin trading this Wednesday (September 2nd).   MSOS becomes the first U.S.-listed active ETF to deliver exposure dedicated solely to American cannabis companies, including multi-state operators (MSOs). MSOs are U.S. companies directly involved in the legal production and distribution of cannabis in states where approved.

The company said that MSOS will seek long-term capital appreciation by investing entirely in legal, domestic cannabis equity securities. MSOS’ domestic equity strategy allows this active ETF to allocate its underlying portfolio among multi-state operator (MSO) companies as well as other U.S.-based cannabis-focused areas such a REITs, cannabidiol (CBD), pharmaceutical and hydroponics.

MSOS becomes AdvisorShare’s second dedicated cannabis investment strategy alongside the AdvisorShares Pure Cannabis ETF (Ticker: YOLO). When YOLO launched on April 18, 2019, it became the first U.S.-listed active ETF dedicated to cannabis exposure – investing in both domestic and foreign cannabis equity securities. MSOS joins YOLO as the only U.S.-listed cannabis ETFs that maintain an established, Federal bank as fund custodian.

The portfolio manager of MSOS is Dan Ahrens, AdvisorShares chief operating officer, who also serves as portfolio manager of YOLO and the AdvisorShares Vice ETF (Ticker: ACT). Ahrens carries a well-established expertise of investing in cannabis and other highly regulated areas of the market.

“We are pleased to offer MSOS in addition to YOLO which we believe responds further to meeting investors’ demands for more U.S. cannabis investment exposure,” said Ahrens. “We believe that the U.S. clearly represents the most attractive opportunity for cannabis investment and remains an exponentially larger market than the Canadian cannabis market. We feel strongly that our active portfolio management serves as the most advantageous way to invest in the emerging cannabis space.”

Ahrens has long held the view that the U.S. cannabis market is largely untapped and possesses the most significant upside potential in the global cannabis marketplace. Early in the COVID-19 crisis, cannabis dispensaries were deemed essential business in most U.S. states and never closed. Both CBD and marijuana have sold at record levels throughout Canada and legal states in the U.S. this year.  Ahrens steadfastly believes security selection and risk management remains imperative in this emerging and volatile space.


StaffApril 3, 2020
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12min23180

Horizons ETFs Management Inc. has completed the quarterly rebalance of the constituent holdings of the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) and the Horizons US Marijuana Index ETF (NEO:HMUS).

This quarter, four companies were removed from HMMJ’s portfolio:

Deletions

Company Name

Ticker

Exchange

Abacus Health Products Inc.

ABCS

Canadian Securities Exchange

Agraflora Organics International Inc.

AGRA

Canadian Securities Exchange

Flower One Holdings Inc.

FONE

Canadian Securities Exchange

CBDMD Inc.

YCBD

New York Stock Exchange

Performance Update as of March 31, 2020,

1
Month

3
Month

6
Months

YTD

1
Year

Annualized
Since Inception**

HMMJ

-15.28%

-28.36%

-45.68%

-28.36%

-69.05%

-9.55%

NAMMAR Index

-17.27%

-32.10%

-43.98%

-32.10%

-69.91%

-15.89%

TX60AR Index

-15.30%

-18.48%

-16.49%

-18.48%

-11.68%

-0.79%

HMUS REBALANCE

Launched in April 2019, HMUS is the world’s first U.S.-focused marijuana index ETF. HMUS seeks to replicate, to the extent possible, the performance of the US Marijuana Companies Index, net of expenses. This index is designed to provide exposure to the performance of a basket of publicly-listed companies having significant business activities in, or significant exposure to, the marijuana or hemp industries in the United States. Constituents of this index are selected from Canadian and U.S. exchanges. While some securities may be listed on major North American exchanges, the majority of the securities currently trade on North American exchanges that include but are not limited to the Canadian Securities Exchange and the Aequitas NEO Exchange.

This rebalance resulted in the removal of six companies from the portfolio:

Deletions

Company Name

Ticker

Exchange

Abacus Health Products Inc.

ABCS

Canadian Securities Exchange

Body & Mind Inc.

BAMM

Canadian Securities Exchange

Ignite International Brands

BILZ

Canadian Securities Exchange

Green Growth Brands Inc.

GGB

Canadian Securities Exchange

Plus Products Inc.

PLUS

Canadian Securities Exchange

CBDMD Inc.

YCBD

New York Stock Exchange


Debra BorchardtApril 16, 2019
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14min30363

Horizons ETFs Management (Canada) Inc. said that it has filed its final prospectus to launch the Horizons US Marijuana Index ETF. Units of the exchange-traded fund have been conditionally approved for listing by the NEO Exchange and are slated to begin trading on April 18, 2019, under the ticker symbols HMUS (Canadian dollar units) and HMUS.U (U.S. dollar units).

“While marijuana remains federally illegal for medical and recreational usage in the United States, the number of legal cultivators and distributors at the U.S. state level continues to grow. Many of these companies have chosen Canadian stock exchanges to list their stocks in order to raise capital to meet growing investor demand,” said Steve Hawkins, President, and CEO of Horizons ETFs. “HMUS will be the first index ETF solution to focus solely on identifying and investing directly in, U.S. marijuana and hemp companies. As the U.S. continues to further liberalize its marijuana regulations, we anticipate that more investors will be looking to invest in companies with significant business operations in the U.S. market and HMUS will provide a diversified and liquid way to gain that exposure in one ETF.”

The company said that HMUS will be the first ETF in the world that is solely focused on providing exposure to companies with significant business activities in, or significant exposure to, the United States marijuana or hemp industries. HMUS is an index  ETF, which seeks to replicate, to the extent possible, the performance of the US Marijuana Companies Index, net of expenses.

The NEO Exchange is a Canadian stock exchange based in Toronto. According to Wikipedia, it is marketed as Canada’s New Stock Exchange, NEO aims to help companies, dealers, and investors by creating a better listing experience, eliminating predatory market behaviors such as high-frequency trading and implementing a unique market making program to ensure liquidity.

Companies In The Index

The top-20 constituents and weights of the Underlying Index as of April 15, 2019, are in the table below:

CONSTITUENT NAME

TICKER

WEIGHT

CURALEAF HOLDINGS INC

CURA :CSE

12.60%

CRESCO LABS, INC

CL :CSE

11.94%

CHARLOTTE’S WEB HOLDINGS, INC

CWEB :CSE

10.96%

MEDMEN ENTERPRISES INC

MMEN :CSE

8.68%

GREEN THUMB INDUSTRIES INC

GTII :CSE

7.61%

ACREAGE HOLDINGS INC

ACRG/U :CSE

5.16%

IANTHUS CAPITAL HOLDINGS, INC

IAN :CSE

4.96%

GREEN GROWTH BRANDS INC

GGB :CSE

3.85%

TERRASCEND CORP

TER :CSE

3.76%

CANNAROYALTY CORP

OH :CSE

3.68%

HARVEST HEALTH & RECREATION INC

HARV :CSE

3.64%

FLOWER ONE HOLDINGS INC

FONE :CSE

3.32%

SLANG WORLDWIDE INC

SLNG :CSE

2.60%

CANNABIS ONE HOLDINGS INC

CBIS :CSE

1.68%

LIBERTY HEALTH SCIENCES INC

LHS :CSE

1.62%

VALENS GROWORKS CORP

VGW :CSE

1.57%

CANNABIS STRATEGIES ACQ. CORP

CSA/a: NEO

1.48%

PLANET 13 HOLDINGS INC

PLTH :CSE

1.27%

TRULIEVE CANNABIS CORP

TRUL :CSE

1.05%

SUNNIVA INC.

SNN :CSE

0.99%

Horizons said in a statement that the companies in the index are selected from Canadian and U.S. exchanges. While some securities may be listed on major North American exchanges, the majority of the securities currently trade on North American exchanges that include but are not limited to the Canadian Securities Exchange and NEO.

The Underlying Index is market-capitalization-weighted, subject to a cap for each constituent issuer of a maximum of 10% of the net asset value of the Underlying Index at the time of any rebalancing. For a security to be eligible for the Underlying Index, the issuer will generally need to have a market capitalization of greater than $75 million.

“The Horizons Marijuana Life Sciences Index ETF was the first Marijuana ETF listed in the world. We launched that ETF shortly before cannabis was fully legalized in Canada,” said Mr. Hawkins. “We see a lot of similarities with the regulatory environment in the U.S. to what we saw in Canada, three years ago. If the U.S. were to enact any type of federal legalization, either medical or recreational, that would immediately make the U.S. the largest federally approved cannabis market in the world. HMUS will give investors direct diversified access to this early stage sector which has the potential of future U.S. regulatory change.”


Debra BorchardtJune 29, 2018
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3min18623

The Horizons Marijuana ETF (HMMJ) has added four new companies to the portfolio. They include Hempco Food & Fiber (HEMP), Lexaria Bioscience Corp. (LXX), The Green Organic Dutchman (TGOD) and Village Farms International (VFF).

“The HMMJ portfolio continues to grow as more companies achieve a size and scale that allows them to be eligible for inclusion in the North American Marijuana Index,” said Steve Hawkins, President, and Co-CEO of Horizons ETFs. “Now that we have confirmed that the official start-date of recreational marijuana legalization will commence on October 17, 2018, we expect that more companies in Canada will continue to ramp-up their marijuana-focused activities over the next quarter.”

Horizons said in its statement that rebalancing of the North American Marijuana Index, and consequently HMMJ, occurs each calendar quarter. At that point, all stocks eligible for inclusion in the index are weighted by their respective market capitalization. However, no single stock can exceed 10% of the weight of the index at the rebalance date

The Horizons Emerging Growers Index (HMJR) added several new companies to its portfolio. They include Heritage Cannabis Holdings (CANN), Supreme Cannabis (FIRE) Invictus MD Strategies (GENE), Golden Leaf Holdings (GLH), Newstrike Resources (HIP), Liberty Health Sciences (LHS), Matica Enterprises (MMJ), Friday Night Inc. (TGIF) and THC Biomed (THC).

The Index also removed some companies that no longer qualified. These included Canada House Wellness Group (CHV), Liberty Leaf Holdings (LIB), Marapharm Ventures (MDM), PUF Ventures (PUF) and Hydropothecary Corporation (HEXO).

We would expect HMJR to have a slightly higher turnover than HMMJ, since it can hold stocks with smaller market capitalizations, but it will also be required to sell stocks that exceed a certain market capitalization,” said Mr. Hawkins. “Companies that graduate out of HMJR could potentially be in the HMMJ portfolio, so between the two ETFs, investors would have a more comprehensive exposure to the investable universe of listed marijuana securities in Canada.”

According to the company, HMJR has four key differences compared to HMMJ. HMJR invests in smaller market-capitalization companies than HMMJ and its portfolio is 100% invested in marijuana producers and distributors, and it can have exposure to companies outside of North America. In addition, HMMJ is listed on the Toronto Stock Exchange, while HMJR is listed on the NEO Exchange.


StaffMarch 20, 2018
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6min14100

Horizons ETFs Management completed its quarterly rebalance of the  holdings of the Horizons Marijuana Life Sciences Index ETF (HMMJ) on March 16, 2018. As a result, 10 new companies have been added to HMMJ’s portfolio.

The HMMJ portfolio recently expanded to include the following constituents:

Company Name Ticker Exchange
Abattis Bioceuticals Corp. ATT Canadian Securities Exchange
Beleave Inc. BE Canadian Securities Exchange
HIKU Brands Co. Ltd. HIKU Canadian Securities Exchange
Isodiol International Inc. ISOL Canadian Securities Exchange
National Access Cannabis Corp. NAC TSX Venture Exchange
Neptune Technologies and Bioressources Inc. NEPT Toronto Stock Exchange
Nuuvera Inc. NUU TSX Venture Exchange
Tetra Bio-Pharma Inc. TBP TSX Venture Exchange
Terrascend Corp. TER Canadian Securities Exchange
THC Biomed International Ltd. THC Canadian Securities Exchange

“One of the key benefits of HMMJ is its diversification – providing access to a broad cross-section of stocks involved in the marijuana sector. It’s exciting to see an increase in the number of investable companies that qualify to be included in HMMJ’s portfolio,” said Steve Hawkins, President, and Co-CEO of Horizons ETFs. “As we move closer to the Canadian government legalizing the recreational use of marijuana, we continue to watch the Cannabis sector rapidly grow in size and breadth.”

The Index now has 39 total holdings:

HORIZONS HMMJ HOLDINGS
as at 03/16/2018
GW PHARMACEUTICALS PLC . 7.06%
INNOVATIVE INDUSTRIAL PROPERTI . 0.43%
INSYS THERAPEUTICS INC . 2.34%
SCOTTS MIRACLE-GRO CO/THE . 6.74%
22ND CENTURY GROUP INC . 1.57%
ZYNERBA PHARMACEUTICALS INC . 0.82%
NEPTUNE TECHS & BIORES INC . 0.78%
ABATTIS BIOCEUTICALS CORP 0.22%
HARVEST ONE CANNABIS INC . 0.60%
ISODIOL INTERNATIONAL INC 1.01%
HIKU BRANDS CO LTD . 1.03%
NEWSTRIKE RESOURCES LTD . 2.29%
EMBLEM CORP . 0.59%
TETRA BIO-PHARMA INC 0.31%
HYDROPOTHECARY CORP NEW . 2.57%
TERRASCEND CORP . 0.77%
NATIONAL ACCESS CANNABIS CORP 0.44%
WEEDMD INC . 0.73%
CRONOS GROUP INC . 6.75%
ABCANN GLOBAL CORP . 1.38%
MEDRELEAF CORP . 7.93%
NUUVERA INC 1.57%
DELTA 9 CANNABIS INC . 0.61%
ICC LABS INC . 0.84%
SUPREME CANNABIS CO INC THE NEW 1.98%
RADIENT TECHNOLOGIES INC . 1.28%
ORGANIGRAM HOLDINGS INC . 2.22%
INMED PHARMACEUTICALS INC . 0.63%
APHRIA INC . 9.51%
AURORA CANNABIS INC . 14.30%
THC BIOMED INTL LTD 0.53%
EMERALD HEALTH THERAPEUTICS . 2.59%
CANOPY GROWTH CORP . 12.37%
BELEAVE INC . 0.27%
CANNTRUST HOLDINGS INC 3.21%
MARICANN GROUP INC . 0.87%
INVICTUS MD STRATEGIES CORP NEW 0.73%

Debra BorchardtMarch 5, 2018
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9min45060

There is strong demand for ETF’s (Exchange Traded Funds) with cannabis stocks, but the barriers in the marketplace have made filling that demand difficult. Investors would like to put their money in an ETF versus indivdual stocks because they can diversify their holdings, but also because they can rely on a portfolio manager to do the research.

Since there can be so many sketchy marijuana stocks that are publicly traded, investors prefer someone else do the homework to make sure they are investing in a quality company. Normally Wall Street is thrilled to create a financial instrument where there is demand. Hey they’ll create financial instruments even where there isn’t demand and convince investors they want it. Yet the cannabis ETF is a tricky challenge to solve.

“There are two problems I see with the public trading of anything cannabis,” said David Friedman, CEO of Panther Capital. “First is the regulatory fear around the custody and trading of the underlying securities. There are regulatory risks as well as reputational ones.” Friedman added, “The second is the liquidity of the underlying assets and the ability to trade them.”

Custodial Banks

So, let’s unpack that first problem where we dive into the back office. The assets of an ETF in the U.S. have to be custodied in a U.S. bank. It can’t be offshore or in Canada. The custodial bank actually holds the securities of the ETF. This is why the main cannabis ETF’s are in Canada with the Horizons company. The Marijuana Life Sciences ETF trading under the ticker HMMJ and the Emerging Marijuana Growers Index (HMJR).

Recently, the Alternative Harvest ETF (MJ) launched with great fanfare as the only U.S. cannabis ETF. Then just as quickly, its custodian U.S.Bancorp changed its mind and declined to hold the assets. The fund used to invest in Latin American Real Estate, but with the money pouring into Horizons fund the ETF did a pivot and set itself up for cannabis.

The custodial bank has the right to terminate the contract and must give the company notice, which is usually 90 days. During this time, the ETF company can go look for another bank, except in this case that is easier said than done. Since marijuana is still federally illegal and the Cole Memorandum was recinded by the Justice Department, banks are extremely reluctant to do business with any cannabis company, even if it doesn’t “touch the plant.” If Alternative Harvest can’t replace the bank and find another custodian, it would more than likely be forced to close the fund and liquidate the holdings it has already amassed. The fear is that a large scale dumping of cannabis stocks would wreak havoc on the cannabis companies as their stock prices would plunge. For now though, the MJ is up and running.

This is why the Horizons ETF has been so successful and now has C$720 million in assets under management. Banks in Canada haven’t had the same issue as the U.S. banks since that country has legalized medicinal marijuana. Mark Noble, head of Sales Strategy at Horizons said that since Canada already had the capital infrastructure set up it wasn’t difficult to establish the ETF. “Our only difficulty was getting a sign off from the brokers and the auditors,” he said. “After numerous conversations, it was able to be done. All the stocks that are held are running legal businesses through Canadian standards.”

Liquidity

The stocks in the Horizon ETF’s are also trading on major exchanges in Canada, which brings us to the second problem, liquidity. As millions pour into these ETF’s, the funds have to actually go out and purchase those underlying stocks. There has to be enough to go around and when the ETF wants to sell, there have to be enough buyers in the market.

Most of the cannabis stocks in the U.S. are traded in the OTC Marketplace. There are a handful of biotech stocks traded on the NASDAQ Exchange (NDAQ) that have a cannabis component. High Times Media also called Origo Acquisition Group (OACQ) is trying to remain listed on NASDAQ, but the exchange keeps trying to delist them and Canadian medical marijuana producer Cronos Group (CRON) recently uplisted from the International Exchange to the Global Exchange. The New York Stock Exchange (NYA)  is also hesitant to list cannabis stocks, but a few have managed to squeeze their way in the door. However, the majority of pure cannabis stocks are at the OTC.

“Not every structure allows you to automate trading of the OTC stocks in baskets,” said Friedman. “Most of the OTC stocks trade too thinly to build any assets under management. It won’t be liquid if it grows too large.” Of course that is the name of the game, these ETF’s need to be big to be profitable.

Horizons saw the interest in the smaller names and created its junior ETF that recently launched has quickly grown to C$50 million in AUM. “The newer ETF is targeting cultivators one hundred percent,” said Noble. “The growers for a lack of a better term with a market cap of C$50-500 million. It’s smaller companies with the most amount of upside growth potential.”

Alternatives For Alternatives

One way around these cannabis ETF barriers is to create a less than pure cannabis ETF. Dan Ahrens, Portfolio Manager of the Advisor Shares Vice ETF (ACT) includes alcohol and tobacco stocks along with acceptable cannabis stocks. “We’re comfortable with the way we’ve invested,” said Ahrens. “We readily admit we’re not invested in pure marijuana growers, yet, but we’ll be ready for the future that’s coming.”

His fund invests in only exchanged-traded cannabis stocks. If cannabis ever gets legalized, the fund will have already established a foothold in the cannabis ETF arena. Having said that, Ahrens noted that alcohol and tobacco companies have already begun making overtures towards cannabis companies, so it isn’t inconceivable that these industries would end up overlapping. Also, by sticking with exchange-traded stocks, the Vice ETF avoids the custodial bank issues. He expressed concern about the Alternative Harvest fund, “If that fund is forced to close down and money is leaving those stocks. Their prices could go tumbling. That’s people taking out $300 million.”

That is a big problem indeed. Industry insiders are closely watching the situation at Alternative Harvest and hoping the ETF finds another custodial bank. In the meantime, it looks like money will continue to flow across the border to Canada and Horizons will be happy to fill those investors desire for a cannabis ETF.


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