US Marijuana ETF Boom Stalls

June 26, 2018

The ETFMG Alternative Harvest ETF (MJ) started off 2018 with a bang.

Fresh off a controversial index change at the end of 2017 that swapped its flagging Latin American real estate index for one that tracked legal cannabis companies, MJ attracted a whopping $401 million in new net inflows during the first two months of the year.

Excitement around the fund was high; in fact, Bloomberg Senior ETF Analyst Eric Balchunas even said that MJ was "on pace to take in $1 billion" or more.

And then … nothing.

Since March 1, MJ—now at $408 million in assets under management—has brought in just $14 million in new net inflows. In fact, the fund hasn't seen any net flows since June 12, shortly after President Trump announced he was likely to back legislative efforts to let states decide whether to legalize marijuana. Prior to June 11, MJ hadn't seen any new money since April.

Not even the Canadian Senate's vote on June 20 to officially legalize recreational marijuana nationwide moved the needle for MJ (56% of the ETF by weight is in Canadian-listed stocks). So where did all the excitement for marijuana ETFs go?

MJ's Performance Lags

MJ's lack of inflows isn't due to lack of investor interest in the space, as the fund consistently ranks among the top most-searched-for ETFs on our site (read: "Most Searched ETFs On ETF.com").

Instead, MJ's lackluster performance is more likely to blame. Though MJ saw a performance spike shortly after it switched indexes on Dec. 26, 2017, mirroring a similar spike in marijuana stocks as a whole, the fund's returns ever since have been anemic. Year-to-date, MJ is down 2.25%:

 

 

(Longer-dated historical returns for MJ may look impressive, but keep in mind they are irrelevant. On a one-year basis, MJ is up 11.9%. That figure, however, includes returns from before MJ switched indexes.)

Dragged Down By Tobacco Stocks

At first, it may seem counterintuitive that MJ's year-to-date performance is so low, considering the marijuana sector has been buoyed by the Canadian legalization push. The North American Marijuana Index, which tracks cannabis companies in the U.S. and Canada, is up 19% over the past six months.

Individual marijuana companies have fared much better. For example, the stock prices of MJ's top three holdings—The Green Organic Dutchman, MedReleaf Corp. and Canopy Growth Corp.—have risen 77%, 35% and 41% year-to-date, respectively:

 

 

However, MJ's 22% weighting to tobacco stocks—which many experts consider a forward-looking play on the cannabis space—has likely dampened fund returns.

Performance of the tobacco sector is far more mixed. For example, the top three tobacco-related stocks in MJ—Turning Point Brands, 22nd Century Group and Philip Morris—are up 48%, down 14% and down 22% year-to-date, respectively:

 

Charts courtesy of StockCharts.com; data as of June 25, 2018

 

On the other hands, the AdvisorShares Vice ETF (ACT), which tracks a mixed portfolio of alcohol, tobacco and cannabis stocks, has seen slightly better year-to-date performance: -0.72%. ACT's outperformance relative to MJ is likely due to the fact that ACT holds more than half its portfolio in alcohol stocks, such as Boston Beer Co., Constellation Brands and MGP Ingredients, which are up 58%, 0.35% and 22% year-to-date, respectively.

As for the rest of its holdings, ACT holds roughly 20% in marijuana companies and 26% in tobacco stocks. Investors have yet to respond to ACT's particular blend of "vice" stocks, however: The $13 million ETF has brought in just $5.4 million in new money year-to-date.

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