For marijuana ETFs, the last 24 months have been a total bummer, with nothing but stems and seeds to show for returns.
For all the enthusiasm we saw in these ETFs’ early days, the reality that the halcyon-days sentiment could not sustain this brave new world of ETF investing that has now taken root.
Returns in the past 24 months are negative, mired in losses of 48%-68%.
In fact, most pot ETFs have been riding a slow decline pretty much since they burst onto the scene in 2019. Only the first-to-market—and largest—marijuana ETF, the ETFMG Alternative Harvest ETF (MJ), has managed to make any money for investors, and that was back in 2018, when it was the lone game in town and there was excessive speculation on publicly traded pot stocks in Canada.
Fanfare Unmatched By Returns
MJ’s quick rise to adoption unleashed a wave of marijuana ETF launches, including:
- AdvisorShares Pure Cannabis ETF (YOLO) is an actively managed marijuana ETF with the second-highest assets under management of $62 million and an expense ratio of 0.74%.
- The Cannabis ETF (THCX) is a market-cap-selected and -weighted index of North American cannabis companies, which has $21 million in AUM and a 0.70% expense ratio.
- Global X Cannabis ETF (POTX) tracks an index of developed-market companies related to cannabis, hemp and CBD, and has $15 million in AUM and a 0.50% expense ratio.
- Amplify Seymour Cannabis ETF (CNBS) is also actively managed, and is the smallest marijuana ETF, with $6 million in AUM and a cost of 0.75%
- MJ has $574 million in AUM and a 0.75% expense ratio. At one point, MJ topped $1 billion in assets, but outflows in the fund picked up as performance fell into a stupor.
Several other marijuana ETFs have since come to market. (Click here for a complete list of marijuana ETFs.) But the above group represents what has been happening since the novelty of being able to invest in a marijuana ETF became available in 2018.
The 2018-2019 period was right before and after Canada legalized marijuana on a federal level. That proved to be a powerful catalyst for an emerging segment that has since fizzled.
Second Wind May Be Blowing
But this October has been a different ride. There’s been an abrupt turnaround on the back of another potential breakthrough decriminalization story.
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What you would think would be a widely covered news story during a presidential campaign went largely unnoticed by the public. A U.S. House vote in late September pushed a big turn of the wheel toward legalization of marijuana nationally. As reported by Investor Place:
“In late September, a U.S. House vote to remove marijuana from the federal Controlled Substances Act was delayed until after the presidential election. If the House remains controlled by Democrats, industry analysts expect the Marijuana Opportunity Reinvestment and Expungement (MORE) Act to potentially pass before the end of 2020. Then, it would be up to the Senate to possibly take a similar action…. Democratic vice president nominee Kamala Harris has recently said marijuana would be decriminalized at the federal level under a Biden administration.”
The news did not go unnoticed to traders who have been bidding up marijuana ETFs since the beginning of the month. While marijuana can currently be legally sold to recreational users in a dozen states, decriminalization at a federal level has bigger implications for the market.
Final Piece In The Pot Biz Puzzle
Because marijuana is a controlled substance, businesses engaged in the selling and cultivation of cannabis are blocked from using the federal banking system, which is a major roadblock for an industry striving to go mainstream. The inability to use credit cards for transaction or FDIC-insured banks has been a limitation for the industry, as well as a hinderance to investment.
Some investors simply cannot invest in an industry deemed illegal on a federal level. If decriminalized, however, marijuana-linked companies can enter the federal banking system, access capital markets and even list on exchanges. That would be a breakthrough for this industry.
Even without legalization, U.S. retail sales of cannabis products are expected to double by 2024 to some $30 billion, according to Marijuana Business Daily. Certainly, a legitimized $30 billion industry with revenues doubling in a few years would attract top investors globally.
The other boon federal decriminalization could unleash is to open the doors for some of the world’s top food, beverage and tobacco companies like Coca-Cola, Philip Morris and Constellation Brands to enter the marijuana industry and take it to the next level.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
While the status quo remains the same for now, and the outcome of a U.S. presidential election next month remains to be seen, the winds of a better future are certainly blowing in this sector’s direction.
Drew Voros can be reached at [email protected]