The global economy has been slowly re-opening following the COVID-19 outbreak and the stock market has been surging higher as of lately. As economies continue to re-open, we expect to see increasing interest in burgeoning industries and believe that the cannabis industry is well positioned to record impressive growth.
So far this year, we have noticed an increase in the amount of questions on Exchange Traded Funds (ETFs) that are levered the cannabis industry and this is a topic we want to discuss in more detail. ETFs are structured to provide leverage to a basket of companies that are levered to a specific market.
In regard to the cannabis industry, all of the ETFs are highly levered to the Canadian cannabis industry. These funds have zero exposure to the US cannabis sector and we find this to be a compelling reason for us to avoid these opportunities. Due to the nature of the US cannabis industry, these types of businesses are not allowed to be owned by ETFs that trade on the Toronto Stock Exchange (TSX).
When we analyze the global cannabis opportunity, we are most excited about the US cannabis market and believe that it represents the most attractive vertical of the entire sector. For this reason, we are going to be patient and wait for the launch of an ETF that hold US cannabis assets and want to highlight the other funds in the space.
ETFMG Alternative Harvest ETF (MJ: NYSE) is one of the best-known cannabis focused ETFs and is an opportunity that we have been following. In 2017, the fund commenced trading on the NYSE and it offered investors leverage to more than 30 public companies. As of June 6th, more than 30% of the assets that are owned by the fund are Canadian Licensed Producers (LPs).
Although we are favorable on the long-term opportunity that is associated with leading Canadian cannabis producers, we believe that the fund needs to have an active investing approach rather than a passive approach. With a passive approach, the ETF must wait for the end of the quarter to rebalance the portfolio and we are not favorable on this due the volatility that is associated with the sector.
Horizons Marijuana Life Sciences Index ETF (HMMJ.TO) was the first cannabis focused ETF to commence trading on the TSX and is an opportunity that our readers need to be aware of. So far this year, the fund is down more than 10% and this is a trend that we will continue to follow. During the last year, the cannabis ETF has lost more than 60% of its value and this is a trend that does not get us excited.
We continue to believe that the cannabis industry is in the early innings of a multi-decade growth cycle and consider the US market to be the most attractive opportunity. Once cannabis is legalized at the federal level in the US, we expect to see a change in the types of assets that are held by existing ETFs and will monitor how the sector continues to advance.
Our bullish thesis for the US cannabis market is based on the following points: 1) US companies are generally more profitable than Canadian companies; 2) the US industry is poised to benefit from what we expect will be a move to more states legalizing cannabis; and 3) the US industry is positioned to benefit from an improvement in regulations on the financial side of the industry and technological innovation (i.e. delivery services).
When it comes to the Canadian cannabis industry, we continue to see a lot of upside potential and prefer smaller sized Canadian LPs like Aleafia Health (AH.TO) (ALEAF) or Namaste Technologies (N.V) (NXTTF). Going forward, we expect selectivity to be more important than ever and believe that these are opportunities to be aware of the Canadian side of the market. In regards to the US cannabis market, we are excited about Planet 13 Holdings (PLTH.CN) (PLNHF) and Innovative Industrial Properties (IIPR).
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Published at Tue, 09 Jun 2020 11:43:55 +0000