Marijuana ETF Top Aug. Performer

August 29, 2018

Flows Trickling Back Into MJ

With all this excitement powering MJ's underlying stocks, money has begun to trickle back into the fund, which experienced a relative flows-drought for most of 2018 (read: "U.S. Marijuana ETF Boom Stalls").

When MJ launched in its current incarnation back in December, a deluge of money entered the fund quickly. Within 30 days of its launch on Dec. 26, 2017, MJ had netted $359 million in new investor assets (read: "5 Traits Of Successful Thematic ETFs").

Yet by February, flows into MJ had begun to slow, drying up almost completely by the beginning of March. Since March 1, MJ has taken in just $25 million in new net assets, $18.4 million of which entered the fund just within the past seven days.

For most of 2018, MJ has hovered between $360 million and $390 million in assets under management. As of Tuesday, however, assets in MJ had risen to $425 million.

Long-Term Returns Tied To Legalization

The question remains as to whether MJ's current outperformance is sustainable. On a year-to-date basis, MJ still lags the broader market, rising 4.3% compared to 9.5% for the SPDR S&P 500 ETF Trust (SPY).

Ultimately, MJ's fate—and the fate of its underlying stocks—rests on legalization, still the biggest obstacle impeding growth of marijuana in the U.S.

Though several states have legalized recreational and/or medical use of marijuana, the federal government still considers it illegal to conduct marijuana-related business transactions. That may seem just a matter of semantics, but it has real-world implications, as virtually no federally licensed U.S. bank is willing to break federal laws and risk potentially losing its FDIC insurance or charter.

As a result, most pure-play marijuana companies in the U.S. still struggle to secure financing or even maintain a corporate bank account. The vast majority of marijuana-related transactions still take place in cash.

This very legal risk led many banks to refuse (and continue to refuse) to custody stocks for a potential marijuana ETF. MJ only came to market when the fund's investment advisor, ETF Managers Group, changed the index on an existing fund, effectively circumventing that fund's custodian (read: "Promise & Peril Of Marijuana ETFs").

Corporate America may be changing its tune when it comes to marijuana, but big financial institutions aren’t. If anything, U.S. banks are doubling down on their refusal to be associated with marijuana-related business.

On Aug. 20, Wells Fargo (WFC) terminated the campaign account of Nikki Fried, a candidate for Florida's agriculture commission, after it came to light that Fried had accepted donations from the medical marijuana industry.

When pressed, Wells Fargo confirmed its decision to terminate the account, saying it was "seeking to comply with federal law."

Contact Lara Crigger at [email protected]

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