Cannabis ETFs Ride High on Potential Federal Legalization

Cannabis ETFs Ride High on Potential Federal Legalization

With new buzz about reclassifying marijuana, ETFs in the sector are up double digits in two days.

Jeff_Benjamin
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Wealth Management Editor
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Reviewed by: Lisa Barr
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Edited by: Lisa Barr

Cannabis ETFs have been riding high since the Aug. 29 request by the U.S. Department of Health and Human Services to downgrade marijuana to a Schedule III substance, which is one step closer to legalization at the federal level. 

In midday trading Thursday, the handful of exchange-traded funds offering exposure to the fragmented cannabis industry were all up between 13% and 24% following rallies on Wednesday when Bloomberg reported the push to reclassify pot into a lower-risk category.  

For investors and financial advisors considering or already exposed to the marijuana market, the latest reports are welcome news for a category that has been generally beaten down as markets continue to navigate the uncertainty of various forms of legalization across 50 states for a substance that remains illegal at the federal level. 

The ETFMG Alternative Harvest ETF (MJ), for example, gained 15% on Wednesday and was up 12% by midday Thursday, but it remains down 50.7% over the past 12 months. 

The Roundhill Cannabis ETF (WEED) gained 12% Wednesday and was up almost 20% by midday Thursday but is down almost 65% over the past 12 months. 

“It clearly makes sense, because if it’s legal at the federal level, they will be able to sell a lot more marijuana. But this is also an example of how volatile sector bets can be,” said Chuck Failla, president of Sovereign Financial Group. 

“You have to wonder how quickly this news will be getting baked into the price of the stocks,” he added. “There’s a difference between what it is trading at and the value of the company.” 

Current Cannabis Industry Hurdles 

Jason Wilson, cannabis research and banking specialist at ETFMG, said if the Drug Enforcement Agency moves forward with the recommendation to reclassify marijuana, it would help eliminate most of the banking and commerce hurdles now hampering growth for the industry. 

“The recommendation to reschedule follows the administrative review of marijuana’s status under federal law that commenced approximately 10 months ago,” he said. “It would remove the tax burden relating to 280E that prevents states’ legal cannabis companies from writing off normal operating expenses and could also open the door to interstate trade.” 

Since 2012, when  Colorado and Washington first legalized marijuana for recreational use, the decriminalization process has rippled across the country in various forms, with some states permitting medical use. 

Idaho, Wyoming, Kansas and South Carolina are the only states where marijuana remains fully illegal. 

“I remember when pot ETFs first came out, one of the biggest variables was legality at the federal level,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence. “But even if it’s legal, the big variable is how much it gets taxed.” 

As far as investing goes, Balchunas still puts marijuana ETFs in the category of trading vehicles because of the potential for extreme volatility. 

“You have to weigh the past performance of these ETFs, which are down 50% and 60%, and when you’re than beat up, you don’t need much to create a pop,” he explained. “If you’re a trader, you know any good news will move it and it has a lot of room to run.” 

 

Contact Jeff Benjamin at @[email protected]    

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.


Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.


Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.