Marijuana ETFs are a good, lower-risk way to play a potential cannabis rebound without investing in individual marijuana stocks. I’ll get to the pros and cons of investing in ETFs vs. stocks in a minute, but first I want to talk about timing as it pertains to the sector.
In the long run, the marijuana industry is heading in the right direction; this is the fastest-growing industry in North America, as the market for legal marijuana (both medical and recreational) booms and gradually displaces the black market.
But these stocks are particularly volatile, so in the short run, if you’re not careful, you can lose a lot of money. And the best way to lose money is to buy when the news is great!
Fact 1. Marijuana stocks peaked way back in January 2014 after California voted to legalize.
Fact 2. Marijuana stocks peaked in January 2018 when California’s legalization became effective.
Fact 3. Marijuana stocks peaked in October 2018 when recreational marijuana became legal across Canada.
So if you want to make money in the sector, the best time to buy is when stocks are down, and that’s difficult without professional guidance—which is one reason to invest in ETFs instead.
Marijuana ETFs to Buy
Five years ago, there were no marijuana ETFs. Now there are nearly a dozen.
Why the sudden explosion?
Because there’s been a lot of hot money flowing into marijuana stocks, and the operators of exchange-traded funds (ETFs) want a piece of the action!
The traditional reasons for buying an ETF are that you can avoid the risk of investing in any one stock but still benefit from the growth of the sector—and the marijuana sector is certainly growing.
However, the flip side to that is that an ETF guarantees performance that is not as good as the best stocks—and we at Cabot specialize in picking stocks. In fact, the current holdings of the Cabot SX Cannabis Advisor are up 193% while the Global Cannabis Stock Index is actually down 65% after plummeting in the last 12 months. The biggest reason for that, aside from expert market timing, is that we’ve been able to invest in the fast-growing U.S. companies that are leading the industry, while most institutional investors, and most ETFs, have so far avoided those companies, because of the issue of federal legality.
Still, for people who want to take the easy route, and avoid the risks of investing in individual stocks, marijuana ETFs can make sense, so let’s review what’s out there in this explosive market sector, starting with the biggest and working our way down.
Marijuana ETF #1: ETFMG Alternative Harvest (MJ)
ETFMG Alternative Harvest was the first marijuana ETF in the U.S. and it’s one of the biggest, with assets of $397 million. ETF Managers Group runs a bunch of very targeted ETFs (13 at the moment), including ETFs that focus on artificial intelligence, climate change, video game technology, cybersecurity, mobile payments, and cloud technology.
Alternative Harvest ETF’s top holding as I write is Cronos (CRON). Several Canadian marijuana providers are also in the top 10. But the ETF holds no U.S. companies that sell marijuana, and that’s because the business of those companies is still illegal under U.S. federal law. In fact, Alternative Harvest’s top holdings include tobacco companies (Altria and Vector Group), as well as companies on the periphery of the marijuana industry, selling fertilizer and cigarette papers.
Lastly, there’s the matter of expense ratios, which is basically what you pay management every year to run the ETF. MJ’s expense ratio is 0.75%.
Marijuana ETF #2: AdvisorShares Pure U.S. Cannabis ETF (MSOS)
AdvisorShares, based in Maryland, offers 21 actively managed ETFs, using a range of relatively aggressive investment styles. Its Pure U.S. Cannabis ETF gets around the question of U.S. federal illegality by holding “swaps,” which give the ETF exposure to the stocks without actually holding them. Thus, MSOS’s largest holdings are “swaps” of all the large U.S. marijuana companies, Green Thumb (GTBIF), Trulieve (TCNNF), Curaleaf (CURLF) and Cresco Labs (CRLBF). Started in September 2020, the ETF has already grown assets to $560 million, and the expense ratio is 0.74%. I like it.
Marijuana ETF #3: Horizons Marijuana Life Sciences Index ETF (HMLSF)
Horizons is a Canadian firm that runs nearly 90 ETFs, and this marijuana ETF was started way back in 2017 (the same year I started Cabot SX Cannabis Advisor, then Cabot Marijuana Investor). Assets are now $158 million. As I write, its top holding is Jazz Pharmaceuticals (JAZZ) and its second is Innovative Industrial (IIPR), but once again, there is no sign of the U.S. marijuana industry leaders. The ETF has an annual management fee of 0.75%.
Marijuana ETF #4: AdvisorShares Pure Cannabis ETF (YOLO)
Older than its U.S.-focused sibling, YOLO is free to diversify outside the U.S. But its assets are only $75 million, significantly lower than the U.S.-centric fund. As I write, the fund’s top holding, accounting for over 35% of assets, is MSOS, followed by a 17% allocation in Village Farms International (VFF), a greenhouse vegetable grower that has successfully diversified into marijuana in Canada and hemp in the U.S. Following that is Innovative Industrial Properties (IIPR), a REIT that is the leading landlord of commercial marijuana growers in the U.S. Like most of its competitors, YOLO’s expense ratio is 0.75%.
Marijuana ETF #5: Global X Cannabis ETF (POTX)
Global X runs an amazing 81 ETFs, and its marijuana-focused ETF, started in September 2019, is on the smaller side, with $48 million in assets under management. By design, the ETF is free to invest wherever it pleases, but right now, 66% of the assets are in Canada, because the fund has avoided the U.S. companies that are not legal under federal law. On the bright side, the expense ratio is just 0.5%.
Marijuana ETF #6: The Cannabis ETF (THCX)
Started in July 2019, The Cannabis ETF is the first ETF offered by Innovation Shares (its second is focused on Fintech), and with $63 million in assets, it’s off to a good start. Still, like most of the players in this category, it’s conspicuously lacking in exposure to the leading U.S. marijuana stocks. The expense ratio is 0.75%.
Marijuana ETF #7: Amplify Seymour Cannabis (CNBS)
Illinois-based Amplify offers 11 ETFs and this one, run by Tim Seymour, was started in July 2019. Happily, the fund invests in the U.S. market leaders, as well as the Canadian leaders. 33% of holdings are in Canada, while 64% are in the U.S. Assets are $43 million and the expense ratio is 0.75%.
Marijuana ETF #8: Cambria Cannabis ETF (TOKE)
California-based Cambria runs 12 ETFs. This cannabis fund, started in July 2019, has assets of $16 million, and an expense ratio of just 0.42%, but once again, there are none of the U.S. industry leaders. The top holding is Constellation Brands (STZ), the beverage company making forays into the cannabis-infused market.
Which Marijuana ETF is Best?
Back in 2017 and 2018, Canadian marijuana stocks led the sector, and I did very well focusing on them. But since legalized marijuana sales began in Canada in October 2018, those Canadian stocks have cooled off (partly because of a glut of legal cannabis in Canada and a shortage of legal outlets). Going forward I remain bullish on the U.S. stocks, simply because the economics are so favorable. So my favorite ETFs fundamentally are those that own the leading U.S. stocks, namely AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares Pure Cannabis (YOLO) and Amplify Seymour Cannabis (CNBS).
Lastly, a word about fees. When stocks (and the ETFs that invest in them) are up big in a year, it’s easy to shrug off an expense ratio of 1%. But when your investment is up only 5%, and then management takes 20% of your gains away, that hurts. So don’t overlook the expense ratio.
For my money, individual stocks remain the place to invest.
To learn which marijuana stocks I like best, click here!
*This post has been updated from an original version, published in 2019.