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

 

Another seven "marijuana related" names touch the industry in some way: drug companies that devote some, but not all, of their resources to cannabinoids; biotech firms like 22nd Century Group, whose subsidiary Botanical Genetics genetically engineers proprietary pot strains; and so on. (The marijuana-related stocks in MJX and ACT are listed in Table 1.)

While some crossover in marijuana holdings exists between MJX and ACT, it's actually not all that much. (That's not counting the tobacco, alcohol and fertilizer firms both funds use to plump up their portfolios; across those nonmarijuana stocks, there's quite a bit of crossover indeed.) Instead, MJX invests primarily in foreign marijuana companies, especially Canadian ones.

It's true that these companies are legal in the U.S., in that they aren't illegal; being foreign companies, they fall outside the Department of Justice's jurisdiction. (And, of course, all the stocks MJX holds operate legally within their countries of origin.) So ETFMG is doing nothing wrong by investing in them. But it also reminds me of an old Futurama quote: "You are technically correct—the best kind of correct." 

 

Marijuana Companies In MJX & ACT

Pure-Play Marijuana Companies Marijuana-Related Companies
Cronos Group Inc Insys Therapeutics, Inc.
Aurora Cannabis Inc. 22nd Century Group, Inc.
Canopy Growth Corporation Arena Pharmaceuticals, Inc.
Medreleaf Corp. Cara Therapeutics Inc
CannTrust Holdings, Inc. AbbVie Inc (ABBV)
CanniMed Therapeutics, Inc. Catalent Inc (CTLT)
Emerald Health Therapeutics, Inc. Abbott Laboratories (ABT)
GW Pharmaceuticals PLC Sponsored ADR  
Supreme Cannabis Company Inc  
OrganiGram Holdings Inc  
Corbus Pharmaceuticals Holdings Inc  
Isodiol International Inc  

Source: ETF.com data as of Jan. 26, 2018

 

Which ETFs Hold Pot Stocks?

I ran these 19 stocks through ETFdb's ETF Stock Exposure Tool to see which other nonmarijuana ETFs held them. (Two companies on this list, CannTrust Holdings and Isodiol International, are traded over-the-counter, and thus do not appear in the lookup tool.)

The results were eye-opening.

Let's start with the pure plays. An additional 40 ETFs hold pure-play marijuana stocks. Mostly these companies appear in trace amounts—but not always (see Table 2).

 

Top 10 ETFs With Exposure To Pure-Play Marijuana Companies

Fund  Ticker %
IQ Canada Small Cap ETF CNDA 5.89
AlphaClone International ETF ALFI 2.52
ALPS Medical Breakthroughs ETF SBIO 2.49
Global X Guru International Index ETF GURI 2.03
VanEck Vectors Pharmaceutical ETF PPH 1.66
Virtus LifeSci Biotech Clinical Trials ETF BBC 1.16
SPDR S&P International Small Cap ETF GWX 0.49
ProShares UltraPro Short Nasdaq Biotechnology ZBIO 0.47
ProShares UltraShort Nasdaq Biotechnology BIS 0.47
iShares NASDAQ Biotechnology ETF IBB 0.47

Sources: ETFdb, ETF.com

 

At 5.89%, the IQ Canada Small Cap ETF (CNDA) dedicates the highest proportion of its portfolio to pure-play marijuana companies. Its weighting is driven by two holdings: Canopy Growth and Aurora Cannabis, which are also CNDA's first- and second-largest holdings, respectively.

The AlphaClone International ETF (ALFI), meanwhile, replicates international hedge fund strategies; it holds 2.52% of its portfolio in one big pot player: GW Pharmaceuticals. The ALPS Medical Breakthroughs ETF (SBIO) has 2.49% in the same stock, which is also one of the fund's top 10 holdings.

When you think about it, the presence of marijuana companies in these ETFs makes sense. Marijuana companies have seen remarkable growth in the past year; the share price of Canopy Growth has tripled year-over-year, while Aurora Cannabis is sevenfold higher. If I'm building a small-cap Canada fund or a medical breakthroughs ETF, why wouldn't I include such obvious outperformers?

 

Spoiler: It Probably Has Pot In it

Still, the presence of marijuana companies in these ETFs is mostly negligible, and I probably wouldn't have even considered writing this blog until I expanded my search to include the seven "marijuana related" companies I listed above. That's where the real surprise happens.

When you widen the search to include all 19 companies that MJX and/or ACT classify as marijuana-related in some way, the list of ETFs holding pot stocks balloons to 339. That's roughly 16% of all ETFs currently on the market, or one in six ETFs.

Interestingly, 19 of those ETFs have exposures of 5% or more:

 

The 19 ETFs With 5% Or More Weighting To Marijuana-Related Companies

Fund Ticker %
First Trust Nasdaq Pharmaceuticals ETF FTXH 15.88
PowerShares Dynamic Pharmaceuticals Portfolio PJP 10.08
Direxion Daily Pharmaceutical & Medical Bull 3X Shares PILL 9.95
iShares U.S. Medical Devices ETF IHI 9.42
VanEck Vectors Pharmaceutical ETF PPH 9.28
First Trust U.S. Equity Opportunities ETF FPX 8.81
ProShares UltraShort Health Care RXD 8.10
iShares U.S. Healthcare ETF IYH 8.09
Health Care Select Sector SPDR Fund XLV 7.78
ProShares Ultra Health Care RXL 7.67
Vanguard Health Care ETF VHT 7.35
Fidelity MSCI Health Care Index ETF FHLC 7.34
Direxion Daily Healthcare Bear 3X Shares SICK 6.89
PowerShares Dynamic Biotechnology & Genome Portfolio PBE 5.98
IQ Canada Small Cap ETF CNDA 5.89
John Hancock Multifactor Healthcare ETF JHMH 5.79
iShares Global Healthcare ETF IXJ 5.70
Inspire 100 ETF BIBL 5.44
WBI Tactical LCY Shares WBIG 5.09

Sources: ETFdb, ETF.com

 

Unsurprisingly, perhaps, 15 ETFs on this list track pharmaceuticals and biotech companies. The First Trust Nasdaq Pharmaceuticals ETF (FTXH) and the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) have double-digit exposures to marijuana companies like AbbVie and Abbott Laboratories. (The Direxion Daily Pharmaceutical & Medical Bull 3X Shares (PILL) follows the same index as PJP, just with leverage.)

Given that medical marijuana is such big business, I'm not surprised to see so many health care companies on the list. One notable absence, however, is the ARK Genomic Revolution Multi-Sector ETF (ARKG), which invests in 35 biotech and pharmaceutical firms and is the second-best-performing nonleveraged health care stock over a one-year period.

The other thing that leaps out at me is the 5.44% weighting to marijuana in the Inspire 100 ETF (BIBL), which tracks U.S. large-caps that hew to "biblical values." The 5.44% comes entirely from AbbVie, BIBL's top holding (see Fig. 3).

 

Fig. 3: Top 10 Holdings for BIBL

Source: FactSet

 

While AbbVie isn't a maker of cannabinoids, it does manufacture dronabinol, a synthetic form of THC, which is the psychoactive substance in marijuana—which is likely the reason AbbVie is also the top holding in ACT.

Let me say that again for those in the back: The "bible" ETF and the "vice" ETF both have the same top holding, AbbVie.

Other notable ETFs with marijuana exposure include the Republican Policies Fund (GOP), at 3.21%; the social media-guided BUZZ US Sentiment Leaders ETF (BUZ) at 3.08%; and the Point Bridge GOP Stock Tracker ETF (MAGA) at 0.74%.

Promise & Potential

There are two ways to interpret this data.

The first is that hundreds of ETFs have an undisclosed risk buried in their portfolios, one that could expose investors to greater volatility and high premiums/discounts, should these ETFs need to dump their holdings in a hurry.

That could happen, I suppose, should the Fed revoke DEA certifications and crack down on medical marijuana research; but the idea of it feels very “Chicken Little” to me.

The second conclusion—and the point I made for Bob Dylan—is that the U.S. is undergoing a massive cultural shift in the way we think about marijuana. No longer are we terrified that marijuana will lead our babies astray. Instead, we're gripped by a whole new reefer madness—the rush to capitalize on and profit from all the potential marijuana has to offer.

When one in six ETFs in the U.S. has at least some exposure to marijuana, the writing's on the wall—or, maybe, blowing in the wind.

As of publication, the author held no positions in any of the securities listed. Contact Lara Crigger at [email protected]

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