Growing Pains For Marijuana ETFs

April 27, 2018

Mixed Signals For Marijuana Stocks

Uncertain regulatory framework in the U.S. may be impacting MJ’s and ACT's ability to draw in money, as the Trump administration has given mixed signals on its stance regarding marijuana.

In January, U.S. Attorney General Jeff Sessions signaled his intent to prosecute federal marijuana-related crimes with renewed vigor, only for the president to indicate in March that he'd leave the question up to individual states.

Then, last Friday, Sen. Chuck Schumer introduced legislation that would remove marijuana from the Schedule I Classification List, therefore decriminalizing it at the federal level. Fellow Democratic Sens. Bernie Sanders, Cory Booker and Kirsten Gillibrand had co-sponsored another similar bill earlier in the month.

Should marijuana become legal at the federal level, it would profoundly impact pot stocks both domestic and abroad, since many have not been able to secure financing or obtain credit in the U.S., due to federal banking laws.

It would also likely entirely eliminate the custodial risk associated with marijuana ETFs, thereby opening the floodgates for new funds.

HMMJ Hits The 1-Year Mark

Meanwhile in Canada, Toronto-listed marijuana ETFs have shown little signs of slowing down, and even fewer signs of hesitation from investors.

The first marijuana ETF on the market, the Horizons Marijuana Life Sciences Index ETF (TSE: HMMJ), celebrated its first anniversary on April 4. In the year since its launch, the $662 million HMMJ has quickly become the top-performing ETF of all Canada-listed funds, rising 58.6% over the past 12 months.

There are also now two additional Canadian marijuana-themed ETFs: the $3 million Evolve Marijuana ETF (TSE:SEED), an actively managed fund; and the $12 million Horizons Emerging Marijuana Growers Index ETF (CN:HMJR), which tracks junior North American pot producers.

All this comes as full legalization of marijuana in Canada, slated for July 1 of this year, has run into some setbacks. Government delays and new packaging requirements threaten to delay the summertime rollout. This, in turn, has pushed down the performance of marijuana stocks (many of which are domiciled in Canada).

As a result, HMMJ is down 22% year-to-date.

Nasdaq Launches Cannabis Index

Last Friday (April 20), Nasdaq launched three new cannabis indexes with little-to-no fanfare. Indeed, there was no official Nasdaq comment on the launch, aside from a filing.

Interestingly, the indexes come from a partnership with Yewno, an analytics firm that uses machine learning and computational linguistics to sort through Big Data. Meaning, these new marijuana indexes have an artificial intelligence-flavored twist baked into them.

The three equal-weighted indexes—the Nasdaq Yewno North America Cannabis Economy Index and its two total return iterations—track U.S. and Canadian companies engaged in the "cannabis economy." There are a few stipulations: Constituents must: 1) engage only in activities that are legal in the jurisdiction under which the company operates; and 2) meet certain liquidity thresholds, such as a minimum market cap of $150 million and a three-month average daily volume of $1 million.

The initial index basket tracks 26 names, many of which should be familiar to followers of the space: Cannabis Wheaton, Cronos Group, Aurora Cannabis, Corbus Pharmaceuticals and so on. In fact, there is substantial overlap (53%) between this index and the benchmark underpinning MJ, which is global in nature.

The Nasdaq Yewno North America Cannabis Economy Index isn't the first stand-alone marijuana index. But it does represent the first time a major U.S. exchange has thrown its hat into the cannabis indexing ring. Nasdaq is already in talks with a number of issuers seeking to license the new indexes for new ETFs, according to one source with knowledge of the discussions.

An interesting side note: Nasdaq is currently embroiled in a lawsuit with the issuer of MJ, ETF Managers Group, over a separate group of ETFs, once trading under the PureFunds brand (read: "Investors Shoulder ETFMG's Legal Costs").

Contact Lara Crigger at [email protected]

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