Finding investable companies in the marijuana industry isn't easy. For starters, there's the legalization issue: Cannabis remains classified as a Schedule I substance, making it difficult for U.S.-based marijuana firms—including growers, retailers and R&D firms—to secure listing on U.S. exchanges.
Then there's the sector's volatility. Marijuana is a rapidly evolving sector, with the individual players and capitalizations changing significantly from year to year, even month to month. Micro caps, reverse takeovers and pink sheets abound, and the handful of well-capitalized, pure-play cannabis companies that do exist often whipsaw monthly in price.
Source: StockCharts.com; data as of Feb. 25, 2019
With such a small investable universe, you might expect the portfolios for the three newly proposed marijuana ETFs to be pretty much carbon copies of the sole existing pure-play on the market, the $1 billion ETFMG Alternative Harvest ETF (MJ) (read: "Competition Heats Up In Marijuana ETFs"). But you'd be wrong.
Each of the three funds proposes a unique mousetrap, ensuring that if and when they come to launch, we wouldn't be looking at a slew of me-too products just trying to recapture MJ's lightning in a bottle.
A Peek Under MJ's Hood
Currently, MJ is the only pure-play marijuana ETF on the market, though the $14 million AdvisorShares Vice ETF (ACT) has 37% of its portfolio in cannabis-related and cannabis-adjacent stocks.
As an index-based fund, MJ tracks U.S. and global companies involved in one of four main lines of industry:
- The legal cultivation, production, marketing or distribution of cannabis (including industrial hemp). To qualify, companies must derive at least half their revenues from cannabis activity.
- The creation, marketing or distribution of prescription-based cannabinoid drugs (as opposed to the "medical marijuana" business, which uses the cannabis leaf rather than compounds and extracts from the plant itself).
- Tobacco companies, including cigarette and cigar component makers.
- Companies that produce fertilizers, pesticides and growing equipment for cultivation.
In addition, MJ implements size and liquidity screens to eliminate stocks with a market cap of less than $200 million and a three-month average daily trading volume lower than $500,000.
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Source: ETF.com; data as of Feb. 25, 2019