The votes are still being tallied, but we know at least one thing for sure: Tuesday was a good night for marijuana advocates, with legalization measures passing in at least four states.
Yet for some reason, the biggest marijuana ETF, the $600 million ETFMG Alternative Harvest ETF (MJ), is down more than 2% in morning trading.
Competing ETFs were also down: As of Wednesday at noon, the $66 million AdvisorShares Pure Cannabis ETF (YOLO) had slipped down 0.16%, and The Cannabis ETF (THCX), with $24 million in AUM, was down 2.4%. The $16 million Global X Cannabis ETF (POTX) was down 4.1%. (Read: "Marijuana ETFs Get Second Wind.")
Curiously, however, the AdvisorShares Pure US Cannabis ETF (MSOS) was up 2.0%.
30-Day Cannabis ETF Returns
Source: StockCharts.com; data as of Nov. 4, 2020
50%+ Overlap Among Global Marijuana ETFs
To untangle what's going on, let's first start where we always do: under the hood.
It makes sense that MJ, YOLO, THCX and POTX would all be trending downward together, as they are all global equity ETFs. Among them, exposure to developed ex-U.S. equities ranges from 39% for YOLO and 67% for MJ, to 73% for THCX and 89% for POTX. (The remainder is U.S. stocks.)
As such, there's a fair bit of portfolio overlap between these four funds. In particular, more than half of all the stocks inside MJ, THCX and POTX are the same—mostly, Canadian pharmaceutical companies:
Source: ETF Action; data as of Nov. 4, 2020
What makes MSOS an outlier is the fact that it holds only U.S. companies. As a result, the ETF holds fewer than 15% of the same stocks as MJ, POTX and THCX; it holds just 22% of the same stocks as its sister fund, YOLO.
US Marijuana ETF Benefits From Vote
That strong U.S. presence has buoyed MSOS this morning, as traders are betting that wider legalization will further stoke the engines of the domestic U.S. cannabis industry.
Last night, voters in New Jersey and Arizona voted to make marijuana usage legal for medical and recreational use, while South Dakota and Mississippi voted to allow its use in medical applications. Results of a fifth ballot measure in Montana, which would make marijuana legal for recreational use, are still pending.
With wider legalization comes a stronger, more viable U.S. marijuana industry, both in terms of more investor capital for expansions and startups and better banking infrastructure for an industry that has historically been locked out of traditional financial channels.
It may also unleash additional untapped demand, driving revenues for existing cannabis companies higher.
More Competition, Possible Oversupply?
In turn, however, more U.S. cannabis companies inherently increases competition for established players in the space, most of which are domiciled overseas; hence, why all the ETFs with a large global equity footprint have faltered.
Looking forward, it'll be interesting to see how additional legalization ripples into the U.S. supply chain. Marijuana is a productive crop with a relatively short growth window of roughly four to six months before harvest. As a result, ample supply will likely materialize to meet demand in states where marijuana has been newly legalized.
In turn, that will help pressure prices downward, which could potentially reduce margins for retailers, while reducing the raw cost of materials for secondary uses. (Read: "Why Marijuana Stocks Are Risky.")
Like all emerging industries, marijuana stocks remain extremely volatile, with price action driven by sentiment as much as fundamentals. This is one market for which it pays to stay mellow.
Contact Lara Crigger at email@example.com