Why Cannabis ETFs Are Flying High Again

Volatile marijuana funds jumped 25% on Schedule 3 classification news.

The U.S. Drug Enforcement Administration (DEA) proposed Tuesday to reclassify marijuana as a less dangerous drug.

The news lit up cannabis ETFs like the AdvisorShares Pure US Cannabis ETF (MSOS), which rocketed 25% higher on hopes of potential growth from broader legalization.

MSOS dropped back down nearly 10% in morning trade Wednesday, as investors wondered if the DEA’s proposal, which is set for review of the White House Office of Management and Budget, will be approved.

If approved, cannabis, currently categorized under Schedule I of the Controlled Substances Act alongside drugs like LSD and heroin, will be part of Schedule III, which includes medication like Tylenol with codeine.

Rescheduling is a crucial step in legalizing cannabis on the federal level, opening the door to more widespread legalization and capital inflows. Recreational marijuana is currently legal in 24 states, with other states allowing cannabis for medical use only.

Why Marijuana Stocks, Cannabis ETFs Are Up in 2024 

Are marijuana stocks and cannabis ETFs finally set for the industry's first big year since 2017, or are investors just riding high on hopes of friendlier legislation that could open the door to more widespread legalization and capital inflows? 

Shares of cannabis and hemp producer and distributor, Canopy Growth Corporation (CGC), were nearly 80% higher on the DEA's Schedule 3 classification news Tuesday, and the marijuana stock is up nearly 200% in 2024.

2024 growth for marijuana stocks and cannabis ETFs started with news of the U.S. Department of Health and Human Services' recommendation to lower the federal classification of cannabis to Schedule III from Schedule I. This recommendation from HHS would made it harder for the DEA to reject.

From its August 2023 low, the ETFMG Alternative Harvest ETF (MJ), which is the first ETF to focus on the global cannabis market, is up 50%. The marijuana ETF has not had a positive calendar year return since 2017, with its worst year in 2022 when it fell 60%. 

What Is a Schedule 3 Drug? 

In the context of drug scheduling in the U.S., substances are categorized into different schedules based on their potential for abuse, medical uses, and overall safety. The schedules are defined under the Controlled Substances Act (CSA), a federal law. Schedule 3 drugs are considered to have a moderate to low potential for physical and psychological dependence compared to drugs in Schedules 1 and 2. 

Examples of substances that were classified as Schedule 3 drugs in the United States include some combination products containing less than 15 milligrams of hydrocodone per dosage unit (e.g., Vicodin) and products containing not more than 90 milligrams of codeine per dosage unit (e.g., Tylenol with Codeine). 

What Are Cannabis ETFs? 

Cannabis ETFs are exchange-traded funds that focus on the cannabis industry. These ETFs provide investors with a way to gain exposure to a basket of stocks related to the cannabis sector, which includes companies involved in the cultivation, production and distribution of cannabis or cannabis-related products. 

The holdings of cannabis ETFs may include companies engaged in activities such as cannabis cultivation, processing, pharmaceuticals, ancillary products and other related businesses. This allows investors to participate in the broader cannabis market. 

5 Top Cannabis ETFs of 2024 by Performance 

Total return as of April 30, 2024. Leveraged ETFs were not considered for our list.

Cannabis Outlook for 2024 

The cannabis market in 2024 looks promising, fueled by potential state legalization, product innovation, and increased investment. However, challenges like federal level approval, competition and regulatory hurdles remain. The actual trajectory will depend on the interplay of these factors and unforeseen developments. 

Positives 

• Growth potential: With new states potentially legalizing adult-use cannabis (Ohio, Florida, Pennsylvania), the market is expected to continue growing at a significant rate, projected to reach $40 billion in 2024. 
• Increased investment: As federal prohibition remains a hurdle, investment could shift towards more established state markets, potentially bringing more capital and stability to the industry. 
• Product innovation: Continued focus on personalized experiences and diverse product offerings (wellness-focused options, craft cannabis) could attract new consumer segments. 
• Regulatory shifts: While federal legalization might not happen in 2024, rescheduling of cannabis by the DEA or progress on the SAFE Banking Act could open up banking and financial services for cannabis businesses, improving their operating environment. 

Challenges 

• Continued federal prohibition: This creates challenges for interstate commerce, research and banking access, hindering industry growth and innovation. 
• Competition: As new markets open, competition could intensify, leading to price pressures and potentially impacting business profitability. 
• Overregulation: Stringent state regulations can burden businesses with compliance costs and limit their operating flexibility. 
• Public perception: Despite growing acceptance, negative stereotypes and concerns about public health impacts persist, potentially impacting consumer adoption in some regions. 

Overall, new legal markets and product innovation could drive growth for cannabis in 2024, but federal issues like prohibition and banking access remain significant hurdles. Competition and regulations also add complexity to the outlook, and investors should expect more price volatility in the coming months.

Always conduct thorough research and consider consulting financial advisors before making any investment decisions related to the cannabis industry.