Trading marijuana ETFs isn't always easy—or cheap.
We first reported on the issue of persistently wide spreads in marijuana ETFs months ago, specifically in the context of the ETFMG Alternative Harvest ETF (MJ), which was for a very long time the only pure-play fund in the space (read: "Large, Liquid ETFs With High Spreads").
Since that article was published, several other cannabis ETFs have launched. Notably, each exhibits the same wide spreads as MJ—or, in some cases, much wider:
|Trading In Cannabis ETFs|
|Ticker||Fund||Expense Ratio||AUM (M)||Avg. Daily Dollar Volume||Spread %|
|MJ||ETFMG Alternative Harvest ETF||0.75%||$1,010||$12.69M||0.24%|
|YOLO||AdvisorShares Pure Cannabis ETF||0.74%||$58||$1.17M||0.44%|
|THCX||The Cannabis ETF||0.70%||$16||$2.27M||0.22%|
|TOKE||Cambria Cannabis ETF||0.42%||$2||$449.55K||0.40%|
Sources: ETF.com, FactSet; data as of Aug. 8, 2019
[Author's Note: Due to incomplete data from FactSet, the Amplify Seymour Cannabis ETF (CNBS) is not included on this list or in this analysis. The actively managed fund, which began trading on July 23, has $3.68 million in assets under management.]
The reasons behind marijuana ETFs' wider spreads are varied and complex, including higher-than-average sector volatility; illiquidity of marijuana securities, many of which are microcaps and/or domiciled overseas; and continued reticence on the part of authorized participants (APs) and market makers to handle securities of uncertain legality.
In some cases, though, certain quirks of the individual ETFs themselves may be influencing spreads as well.
Higher Spreads Than Other Thematic Funds
Wide trading spreads are possible, but not necessarily common in thematic ETFs. Plenty of other popular thematic funds about the same cap size as MJ tend to trade with much narrower spreads.
For example, the Global X Robotics & Artificial Intelligence ETF (BOTZ), the leading artificial intelligence ETF, trades with a 0.05% spread. The Invesco Water Resources ETF (PHO) has a spread of 0.07%:
|MJ vs. Other Comparably Sized Thematic ETFs|
|Ticker||Fund||Theme||AUM (M)||Avg. Daily Dollar Volume||Spread %|
|MJ||ETFMG Alternative Harvest ETF||Marijuana||$1,010||$12.69M||0.24%|
|ITB||iShares U.S. Home Construction ETF||Homebuilders||$1,080||$78.33M||0.03%|
|BOTZ||Global X Robotics & Artificial Intelligence ETF||Robotics/AI||$1,340||$14.69M||0.05%|
|PPA||Invesco Aerospace & Defense ETF||Defense||$1,020||$5.11M||0.05%|
|PHO||Invesco Water Resources ETF||Water||$965||$2.08M||0.07%|
|IHF||iShares U.S. Healthcare Providers||Hospitals/Care Facilities||$942||$11.83M||0.07%|
|GNR||SPDR S&P Global Natural Resources ETF||Natural Resources||$1,040||$6.77M||0.10%|
|HACK||ETFMG Prime Cyber Security ETF||Cybersecurity||$1,490||$6.27M||0.12%|
Source: ETF.com; data as of Aug. 8, 2019
The difference between marijuana and these other themes is the underlying market, which, in the case of cannabis, is extremely small, volatile and illiquid. Not only are marijuana stocks still illegal in the U.S. at the federal level (though most are legal in the state(s) in which they operate), most are still relatively new launches and are characterized by small market capitalizations, thin trading volume and whipsawing price action.
Furthermore, the vast majority of legal cannabis stocks are foreign-domiciled, primarily in Canada. Discrepancies in market hours between the U.S. and foreign exchanges, as well as additional processes required to trade/settle international stocks, can make it harder to buy and sell foreign cannabis companies at competitive prices, thus further reducing liquidity.
"A lot of marijuana stocks aren't very liquid. Even though they trade a lot, the flow is low," said Mark Esposito, president of Esposito Securities, a leading market making firm with experience trading in and acting as AP for cannabis ETFs. "Because of that, people are afraid to trade them, so there's not a whole lot of quotes."
Even though there are more and more cannabis companies doing initial public offerings every day, the overall market remains relatively small in size and capitalization, he adds.
"There aren’t enough stocks to really keep the market afloat," explained Esposito. "Everybody's buying the same names, which is hyperinflating the individual stocks, making them more volatile."