Growing Pains For Marijuana ETFs

April 27, 2018

The political winds around pot are shifting, and for the U.S. medicinal and recreational marijuana industry, the past few months have been dizzying.

That's less true for marijuana ETFs, a sector that finds itself in something of a holding pattern. Since the start of the year, no new marijuana ETFs have launched, nor have new ones been filed, and it's unclear when—or even if—that might change.

Yet there's been plenty of on-the-ground action. We evaluate the latest developments and what they could mean for investors in pot ETFs.

Future Still Cloudy For Pot ETFs

As has reported on in the past, there exists a significant custodial risk to pot ETFs. Many banks have until now refused to shoulder the reputational and potential legal risk of holding stocks that are still illegal at the federal level, at least when doing so explicitly for a cannabis-themed fund.

The two marijuana-related ETFs on the market, the ETFMG Alternative Harvest ETF (MJ) and the AdvisorShares Vice ETF (ACT), each took different approaches to handling this risk. AdvisorShares opted for a fund that offered nonpure-play cannabis exposure, then worked closely with its custodian to select securities for ACT that had been registered with the Drug Enforcement Agency. ETF Managers Group, meanwhile, effectively circumvented its custodian by swapping an existing fund's benchmark for a cannabis index, then relaunching the ETF as MJX, later renamed MJ.

This caused a rift with the fund's custodian, U.S. Bank, that we reported on, and it's unclear whether that conflict has been sufficiently resolved. (U.S. Bank and other custodian banks connected to marijuana ETFs either currently on the market or still in registration did not return our requests for comment in time for publication.)

But as's Managing Director Dave Nadig said in a recent ETF Live chat, "The more time that passes, the less likely there's an issue."

Still, more than four months later, the custodial risk hangs over marijuana ETFs like, well, a cloud. For this story, we also reached out to several issuers whose cannabis-themed ETFs were still in registration; those free to comment did not report any change in the status of their filings.

"To my knowledge, none of the custodians are willing to hold the underlying stocks. Would love to launch if that changed," said one.

Marijuana ETFs See Performance Dip

For the moment, it seems that no news is good news for MJ: The ETF continues to trade, and with healthy volume. MJ is now up to $366 million in assets, making it one of the first true breakout-hit ETFs of 2018. ACT, meanwhile, lags behind, at $12.5 million.

The real obstacle for these funds now may be one of performance. Both MJ and ACT have had less than stellar year-to-date returns: ACT has fallen 5% since Jan. 1, while MJ has fallen more than 12%.





That mirrors a similar collapse in marijuana stocks over the same time period. A whirlwind of shifting stances on pot from the Trump administration, as well as hiccups in the rollout of Canadian legalization, have battered stock prices in the sector. The North American Marijuana Index, which tracks U.S. and Canadian companies, is down 21% year-to-date.

Unsurprisingly, the performance dip has stunted flows into both ETFs. MJ, which pulled in a whopping $377 million in inflows in the first month of the year, has seen new money dry up; since February, the fund has only brought in an additional $33 million. (In March, the fund actually had outflows of $2 million.)

ACT, meanwhile, has struggled to gain and hold on to assets. Year-to-date, the fund has only pulled in $5 million, and had negligible inflows in both February or March.


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