Pot ETFs Riding High on Potential DEA Ruling

It’s been a fun start to 2024 for cannabis ETF investors, and that ride is likely to continue—at least until the federal government takes the next step toward rescheduling marijuana as a drug that can be used for medical purposes.

That momentum that can be traced to a report last fall from the U.S. Department of Health and Human Services—which is awaiting a ruling by the Drug Enforcement Agency—has made cannabis ETFs the three best-performing funds so far this year.

The Amplify U.S. Alternative Harvest ETF (MJUS), the Roundhill Cannabis ETF (WEED) and the AdvisorShares Pure US Cannabis ETF (MSOS) are all up more than 43% this year.

Skeptics will be forgiven for dwelling on the fact MSOS and MJUS were down 72% and 67% respectively, in 2022. WEED wasn’t launched until April 2022, but still fell by more than 54% during that first year.

Interestingly, this recent rally is unique to cannabis ETFs with a U.S. focus, with those ETFs generating about twice the returns of their global counterparts this year.

Extreme highs and lows have been a staple of cannabis investing ever since the industry started listing on public exchanges. But this next move by the DEA is a significant step toward a federal ruling on a controlled substance that is currently regulated through a hodge podge of state-level laws.

Since the DEA is already about a month past its normal 90-day period to respond to the HHS findings, market watchers are in “any-day-now” mode for when or if cannabis could be reclassified from a drug with no medical value to one deemed to have some medical value.

Legalization in the Future

But while moving cannabis into the Schedule 3 category would be significant, it is still a few steps away from legalization at the federal level.

“I would call this piecemeal legislation because it still doesn’t address recreational use,” said Noah Hamman, chief executive officer at AdvisorShares.

“A lot more still needs to be done,” he added.

Representing MSOS, which is the largest cannabis ETF at more than $1 billion, the U.S. marijuana industry is surviving despite federal laws and regulations, Hamman said.

For example, while individual investors can trade publicly listed U.S. cannabis companies on their personal brokerage accounts, ETFs offering exposure to those same U.S. cannabis companies have to use swaps to generate comparable exposure because the banks and platforms that support the ETFs are not allowed to hold cannabis stocks directly.

“Schedule 3 classification would give U.S. companies an advantage but that still doesn’t open up the U.S. market,” Hamman said. “Federally, they haven’t changed anything, but we’re finally getting to the point where at the Federal level they’re catching up a little bit.”

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter