Marijuana ETF Top Aug. Performer

August 29, 2018

It's high times for the ETFMG Alternative Harvest ETF (MJ). As of Aug. 28, MJ was the top-performing ETF over the past 30 days, rising a staggering 27.7%:

 

Source: StockCharts.com; data as of Aug. 28, 2018

 

Much of that outperformance stems from a veritable boom in the fund's underlying stocks. In the last month, large alcohol companies have either bought significant stakes in marijuana companies or indicated an interest.

Beverage Makers Pour In

It all started last October, when alcoholic beverage giant Constellation Brands (STZ) acquired a 9.9% stake in the largest publicly traded marijuana company, Canopy Growth Corp., a major provider of medical marijuana in Canada.

On Aug. 15 of this year, Constellation announced it was spending $3.8 billion to up that share to 38%.

Then in June, Heineken's California-based craft brewer Lagunitas announced it was working on a THC-infused product; THC is the chemical compound in marijuana that produces its signature psychoactive "high."

Weeks later, on Aug. 3, Molson Coors Brewing (TAP) announced it would partner with Canadian marijuana grower Hydropothecary Corp. to jointly develop cannabis-infused drinks for the Canadian market.

As if that weren't enough, on Aug. 24, Bloomberg reported that Diageo (DEO), maker of Guinness Beer and Smirnoff vodka, was in talks with at least three Canadian marijuana companies, to either purchase a stake in those companies or enter a development partnership with them. The time frame for any potential deal was unclear, however.

Fertilizer Giant Explores Deals

Yet it isn't just beverage companies lighting up the cannabis space. In late April, fertilizer giant Scotts Miracle-Gro (SMG) inked a $450 million deal to purchase Sunlight Supply, the U.S.' top hydroponics distributor. Hydroponics are devices that enable the cultivation of crops in water instead of soil; they've long been used by marijuana cultivators.

Sunlight Supply joins Scotts Miracle-Gro's existing marijuana and hydroponics unit, Hawthorne Gardening, which the company has spent hundreds of millions of dollars in building out in recent years.

Curiously, however, tobacco giants like Philip Morris (PM) and Altria Group (MO) have dragged their heels on investing in cannabis assets, even though their vaping devices and e-cigarettes could easily translate to marijuana as well as tobacco.

These companies' reluctance to get involved in the marijuana business may stem from how intensely tobacco companies are regulated by the U.S. government. After all, marijuana is still classified as a Schedule I drug, the same as heroin, and it remains illegal to possess or sell at the federal level.

Rising Tides Lift Cannabis Stocks

All told, the rapid-fire pace of acquisition and partnership announcements has buoyed marijuana stocks to astonishing heights this month.

Since Aug. 1, Canopy Growth Corp.’s stock price has risen 79%, while Hydropothecary’s has risen 30%.

Trickle-down effects extended into Canadian-listed marijuana companies not explicitly making headlines as well. Aurora Cannabis has gained 35% since Aug. 1, Aphria has gained 42% and Cronos Group has gained a whopping 108%.

Those stock price increases have in turn lifted MJ, which has considerable weightings in these outperforming stocks. For example, 11% of MJ's portfolio is in Canopy Growth, while 9% is in Cronos Group:

 

Top 10 Holdings In MJ

Security % of MJ 30-Day Return
Canopy Growth 10.94% 79%
Cronos Group 9.21% 108%
Aurora Cannabis 8.53% 35%
GW Pharmaceuticals 5.90% 9%
CannTrust Holdings 4.86% 50%
Emerald Health Therapeutics 4.25% 59%
Green Organic Dutchman  4.19% 10%
Hydropothecary Corp 3.70% 30%
OrganiGram Holdings 3.59% 14%
Auxly Cannabis 3.29% 48%

Sources: ETF.com, ETF Managers Group, Google Finance; data as of Aug. 28, 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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