Why Cannabis Mutual Funds Don’t Have Bulletproof Shares
The idea of investing in the burgeoning cannabis industry is growing in popularity. There are solid reasons for this, but unfortunately, it’s still not easy to invest in this industry in a way that manages your risk effectively. As always, we’re not fortune-tellers. There are cannabis mutual funds out there already and they may perform extremely well, poorly, or middling over any given time frame. However, we also have a larger perspective that can help you explain why these investments may not be as promising as you would like to think.
Hopefully, this view will help you monitor the status of cannabis mutual funds so you’ll have some sense of how and when the calculus of investing in these mutual funds may change.
The Central Problem with Investing in the Cannabis Industry
Are you bullish on the future of cannabis? We are, too. Specifically, what makes us bullish is what we perceive as the inevitable normalization and de-stigmatization of cannabis throughout American culture. Not that everyone will approve and certainly not that everyone will use, but it will become generally accepted that a lot of people do consume and cannabis and that they’re not a serious threat to society. In other words, we think the long-term forecast for consumer demand is both stable and has room to grow.
Here in lies the problem. It’s still not really possible to invest directly in the U.S. cannabis consumer market—at least not as an industry mutual fund. Indeed, the risk cited to these mutual funds involves their exposure to foreign cannabis producers, the biotech and synthetic cannabis developers, and their lack of access to U.S. markets. Likewise, only one of the funds is traded on a U.S. exchange. The host of high-risk problems involved with investing in individual cannabis companies is just as relevant as ever.
An Overview of Cannabis Mutual Funds
If you’re looking for a more complete analysis of the current, publicly available cannabis mutual funds, we recommend this Forbes article. That said, here is a quick introduction to these mutual funds.
American Growth Fund Series II
The American Growth Fund Series II uses the symbol ‘AMREX.’ Distributed by World Capital Brokerage and with a poor record for investment performance, this fund changed its focus in late 2016 to the cannabis industry. According to Forbes, the fund had just $502,903 in assets under management at the end of October 2017. The fund is also very expensive.
Horizons Marijuana Life Sciences Index ETF
Horizons Marijuana Life Sciences Index ETF had their IPO in April 2017 and is traded on the Toronto Stock Exchange with the symbol ‘HMMJ’ and initial assets of $10 million Canadian. Today, it has over $755 million under management and is the biggest publicly-traded cannabis focused investment fund. The management fee is 0.75%. U.S. investors can purchase the security on the OTC using the symbol ‘HMLSF.’
ETFMG Alternative Harvest ETF
Like AMREX, ETFMG Alternative Harvest ETF, which trades on the NYSE Arca under the symbol ‘MJ’ (formerly ‘MJX’), didn’t begin its life with a cannabis-focus. Previously named the Tierra XP Latin American Real Estate Fund, MJ changed its focus and began trading in late December with just $6 million in assets. It now has almost $400 million under management and has excellent liquidity. Contributing to its success is the fact that it is the only ETF trading on a U.S. exchange. The management fee is 0.75%.
Marijuana Opportunities Fund
Redwood Asset Management oversees this fund, which began trading in early February 2018 on the NEO Eexchange with the symbol ‘MJJ’. Marijuana Opportunities Fund, unlike other ETFs, has the ability to sell short. The top 10 holdings are dominated by Canadian LPs, accounting for over 66% of the fund. As of March 16th, the fund held cash amounting to 22.5% of the portfolio. The management fee is 0.75% and you must invest directly into the Canadian ticker. The assets are $8.2 million Canadian with a low trading volume as well.
Horizons Emerging Marijuana Growers Index ETF
The most recent debut was the Horizons Emerging Marijuana Growers Index ETF, which began trading on the NEO Exchangewith the symbol ‘HMJR’ on February 14th. The ETF limits its holdings to companies with market capitalization below $500 million Canadian. Thus far, it has been a dud compared to HMMJ with assets under management of just $14.6 million and also has a low trading volume. One advantage is that U.S. investors are able to buy it on the OTC under the ticker ‘HZEMF’ without having to have a Canadian brokerage account. The management fee is 0.85%. What I like about this ETF is that the assets it holds are different from the other options, with the no exposure to easy-to-buy large Canadian LPs and some exposure to other geographies, like Australia and the United States.
