The Stealth Marijuana Play In Your ETF

January 30, 2018

During the closing hours of this month’s Inside ETFs, I found myself explaining marijuana ETFs to an industry executive who identified himself only as "Bob Dylan." (No, seriously. This really happened. He cracked a "Tambourine Man" joke and everything.)

My man Bob had questions for me about marijuana ETFs. Big questions. Mainly, he wanted to know if these ETFs even had a chance, given the Department of Justice's renewed enthusiasm for enforcing the federal prohibition of marijuana. If Sessions' witch hunt were to come to pass, it could potentially spell doom for any U.S. company in the business, even if only tangentially.

I couldn't say one way or the other. Nobody can. But the truth is, even if Sessions personally shuts down every mom-and-pop head shop in America himself, I think ETFs will keep on holding pot stocks, just as they always have. He can't shut them all down.

That's because lots of ETFs hold marijuana-related stocks. Hundreds, even. Even the ones you might least expect.

Legality Leaves Open ‘Wiggle Room’

Before we dig into which ETFs hold which marijuana-related stocks, we should take a moment to define what we mean by "marijuana-related."

My definition on what is and isn't a marijuana play is based on the word of actual experts; that is, I look to the holdings of the two marijuana ETFs currently available in the U.S.: the ETFMG Alternative Harvest ETF (MJX) and the AdvisorShares Vice ETF (ACT).

MJX and ACT were constructed with care. Their prospectuses clearly state the companies they've invested in are legal at both the federal and state level. But within that criterion of lawfulness, a certain amount of wiggle room still exists.

To gain its marijuana exposure, ACT invests solely in domestic companies that have been certified by the Drug Enforcement Agency. All five marijuana-related stocks it holds—ACT invests only 20% of its portfolio in such companies—are pharma firms whose business lines include, but aren't limited to, cannabinoid and THC-based medicines.

As such, ACT's portfolio contains some perhaps-surprising names, such as AbbVie and its spinoff Abbott Laboratories, neither of which are commonly thought of as "pot stocks" (see Fig. 1).

 

Fig. 1: Top 10 Holdings For ACT

Source: FactSet

 

Pure Plays Vs. Pure-ish

Compare that with MJX, which offers a more targeted approach. Twelve of its 30 stocks are pot cultivators, cannabis supply chain companies or drugmakers solely focused on cannabinoid medicines—exactly the kinds of stocks I'd typically think of as "pure plays" (see Fig. 2).

 

Fig. 2: Top 10 Holdings For MJX

Source: FactSet

 

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