Dude, Where's My Pot ETF Returns?

This year, ETFs have seen a wave of marijuana-focused ETFs come to market, accompanied with plenty of headline and market noise. What seemed unthinkable—basing a regulated security on the business of marijuana—is not only reality, but is quickly becoming a crowded niche space.

However, issuers have been undeterred, with five marijuana ETF launches this year, following the previous lone entrant and biggest ETF in the space, the ETFMG Alternative Harvest ETF (MJ), which at one point this year had topped $1 billion in assets under management (AUM). It currently holds $826 million in AUM.

The newcomers to the marijuana ETF party this year are:

• AdvisorShares Pure Cannabis ETF (YOLO), $48 million in AUM, launched April 17, expense ratio 0.74%
• The Cannabis ETF (THCX), $19 million in AUM, launched July 9, expense ratio 0.70%
• Cambria Cannabis ETF (TOKE), $9 million in AUM, launched July 25, expense ratio 0.42%
• Amplify Seymour Cannabis ETF (CNBS), $5.5 million in AUM, launched July 23, expense ratio 0.75%
• Global X Cannabis ETF (POTX), $2 million in AUM, launched Sept. 17, expense ratio 0.50%

YOLO and CNBS are both actively managed, while the rest track indexes.

For a new niche market, which carries its share of controversy, the number of launches and the modest assets flowing into them is respectable, but whether it is sustainable is, of course, the big question. While it is safe to say MJ won’t be going up in smoke, how the rest of the field endures will be interesting.

Party’s Over, Returns Down

Right out of the gate the new marijuana ETFs—or cannabis ETFs if you prefer the more benign label—are facing head winds. With the euphoria of these types of products on the market over, and headlines of legalization scattered across the U.S. and abroad baked into prices, the return trend in 2019 is not your friend. (There are no returns here for POTX since it is so new to the market.)

Chart courtesy of StockCharts.com

What has happened is simple market physics. The lean selection of publicly traded marijuana stocks that fit the bill for these ETFs has seen their prices become greatly inflated over the past 12-18 months in the wake of the legalization of marijuana in Canada last year. The majority of stocks held in these ETFs are Canadian domiciled.

Nigam Arora, an investor and founder of The Arora Report, wrote this week in MarketWatch:

“The big change in marijuana stocks is related to momo (momentum) crowd money flows. The momo crowd kept on buying these stocks aggressively as they fell. … Unrealized losses simply became too big for the momo crowd. They could not take it and started selling. Many were getting margin calls and were forced to sell.”

No doubt many investors new to ETFs and stocks piled into marijuana stocks and ETFs because of the exposure, ignorant of the price action they were buying into. Today they are learning the lesson of buying high (security prices, that is).

The Outlook

Behavioral investment wonks would be the first to say that this is the time to be buying. The marijuana markets will grow larger and eventually become more mature and legal in more places, including the U.S. The world has come to grips with marijuana as both a legal product and now an investment vehicle.

However, for the immediate future, the trend down may be more of a friend. Last week, Bank of America analyst Christopher Carey downgraded one of the most traded marijuana stocks, Canopy Growth, from “buy” to “neutral.” Investors’ Business Daily quoted him as saying there are three major head winds facing marijuana stocks (see The Most Valuable Marijuana Stock Faces These 3 Main Risks.

• "Canada industry growth is set to pause in the second half ... potentially flattening, a trend we think could also be the case with Canopy, and yet, the Street is modeling strong double-digit sales growth quarter over quarter."
• Flattening growth could make other targets harder to achieve.
• And finally, the vaping scare could hurt Canopy Growth stock and cannabis stocks, "impacting on sentiment" in the near term.

Nothing in markets goes down or up forever, and this certainly applies to marijuana stocks and ETFs. How these investors ride out bummer returns after buying high when marijuana came out of the gates as the Next Big Investment Thing will be interesting to watch.

Drew Voros can be reached at [email protected]