Cannabis stocks are getting a lot of attention, but what about cannabis exchange-traded funds (ETFs)?
Now that the cannabis industry is beginning to mature, these cannabis-focused investment vehicles have become a budding part of the overall market. Understandably, investors may have a few questions about what cannabis ETFs are on offer, what assets they hold and what the key differences are between the various funds available.
Read on to learn more about the pros and cons of investing in cannabis ETFs and for a look at five available options.
Why invest in cannabis ETFs?
Although the cannabis industry has had some setbacks, investors are optimistic about the sector’s future, and many believe cannabis ETFs are a good way to gain exposure to the sector without having to pick individual stocks.
As mentioned, there are many different ETFs to choose from, meaning that investors can use them to cater to their specific needs and interests. What’s more, ETFs are potentially a safeguard against volatility. Stocks in the industry are known for taking sharp ups and downs, and investing in cannabis ETFs gives those interested in the space the opportunity to get into the sector while enjoying broad exposure and hopefully lower risk.
Cannabis ETFs can also offer protection against legalities, a hurdle when it comes to investing in cannabis.
For example, cannabis remains federally illegal in the US, although many individual states have developed medical and recreational markets. Investors who want exposure to both Canada- and US-focused stocks could minimize their worries about the American market by putting their money into an ETF with exposure to companies in both countries.
What are the downsides of cannabis ETFs?
The current state of the cannabis market can be described as inconsistent at best.
While legalization is becoming more common, one great unknown is the US market, where the drug remains federally illegal. Another key question is what could happen when Big Pharma inevitably arrives.
There are many more considerations as well, and these may make investors hesitant to enter the market.
Looking more specifically at ETFs, analyst Alan Brochstein wrote in Forbes in 2018 that he didn’t believe cannabis ETFs were a buy at that time — five years later, his attitude about them hasn’t changed much. While Brochstein has a fairly US-specific investor lens, he did bring up some interesting points.
He indicated the flaws in various ETFs, which include a lack of growth compared to investing in large producers individually. Indeed, when seen on a graph, it becomes apparent that the biggest gains are generally made by specific companies, not by any cannabis-focused ETFs.
Brochstein also noted that sometimes cannabis ETFs include companies that are less related to cannabis, which may cause them to lag.
5 options for investing in cannabis ETFs
Here’s a look at the biggest five cannabis ETFs by total assets as per data provided by VettaFi. Each ETF offers exposure to different aspects of the cannabis landscape. Read on to learn more about them and why investing could be worthwhile.
All data was current as of September 29, 2023.
1. AdvisorShares Pure US Cannabis ETF (ARCA:MSOS)
Total assets under management: US$594 million
The AdvisorShares Pure US Cannabis ETF is an actively managed fund that was launched in September 2020. The ETF offers exposure solely to US cannabis companies and companies in related markets, including multi-state operators involved in legal cannabis production and distribution.
The US listing for this ETF took some time for AdvisorShares to achieve because cannabis remains federally illegal in the country. “It took a great deal of behind-the-scenes work to get this fund approved,” said Dan Ahrens, managing director and chief operating officer with AdvisorShares, at the time of the launch.
Ultimately, the fund doesn’t directly invest in US cannabis companies, but rather through swap options — derivative contracts — that allow for indirect exposure to these companies.
The ETF’s top five holdings are Green Thumb Industries (CSE:GTII,OTCQX:GTBIF), Curaleaf Holdings (CSE:CURA,OTCQX:CURLF), Verano Holdings (CSE:VRNO,OTCQX:VRNOF), Trulieve Cannabis (CSE:TRUL,OTCQX:TCNNF) and TerrAscend (TSX:TSND,OTCQX:TSNDF). It has an expense ratio of 0.8 percent.
2. ETFMG Alternative Harvest ETF (ARCA:MJ)
Total assets under management: US$261.96 million
The ETFMG Alternative Harvest ETF is a widely diversified option. In addition to cannabis-related stocks, the fund also includes tobacco, real estate and pharmaceutical stocks in its portfolio. Because it is not limited to Canada- or US-based companies, firms from as far away as Denmark are included in the ETF. While the fund was created in 2015, it was originally solely focused on real estate and became a cannabis ETF in late 2017.
The ETFMG Alternative Harvest ETF’s top holding is the company’s US-focused Alternative Harvest ETF (ARCA:MJUS), discussed below, at just over 50 percent. Rounding out its top five holdings are SNDL (NASDAQ:SNDL), Cronos Group (TSX:CRON,NASDAQ:CRON), Canopy Growth (TSX:WEED,NASDAQ:CGC) and Tilray Brands (NASDAQ:TLRY,TSX:TLRY).
The ETF has an expense of 0.75 percent for its shareholders.
3. ETFMG US Alternative Harvest ETF (ARCA:MJUS)
Total assets under management: US$127.27 million
The ETFMG US Alternative Harvest ETF comes from the same company as this list’s number two entry, but it is a more focused offering, tracking cannabis companies that operate exclusively in the US. It was launched on May 12, 2021.
Of the ETF’s 25 holdings, the top five are Green Thumb Industries, Trulieve Cannabis, Innovative Industrial Properties (NYSE:IIPR), Curaleaf Holdings and TerrAscend. The ETF has an expense ratio of 0.75 percent.
4. AdvisorShares Pure Cannabis ETF (ARCA:YOLO)
Total assets under management: US$45.18 million
Next up is the AdvisorShares Pure Cannabis ETF, which was launched in April 2018. The fund operates as an index that allows investors to gain pure cannabis exposure to both domestic and foreign cannabis equities.
The AdvisorShares Pure Cannabis ETF’s top five holdings were the AdvisorShares Pure US Cannabis ETF, Village Farms International (NASDAQ:VFF), High Tide (TSXV:HITI,NASDAQ:HITI), SNDL and Jazz Pharmaceuticals (NASDAQ:JAZZ). The Pure US Cannabis ETF makes up over half of its holdings.
The ETF has a net expense ratio of 0.88 percent.
5. Global X Cannabis ETF (NASDAQ:POTX)
Total assets under management: US$36.16 million
Last on this list is the Global X Cannabis ETF, which was launched in September 2019. It invests in several sectors related to the cannabis industry, including the cultivation of cannabis and hemp and research into pharmaceutical applications. In addition to cannabis, the ETF has holdings in industrial REITs and application software.
Over 60 percent of the fund’s holdings are based in Canada and just over 30 are US-based. There are also a handful of Israeli and Australian companies in the Global X Cannabis ETF’s portfolio.
The ETF’s top five holdings are SNDL, Innovative Industrial Properties, Canopy Growth, Aurora Cannabis (TSX:ACB,NASDAQ:ACB) and Cronos Group. Its expense ratio is 0.51 percent.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.