Exchange-traded funds could help you avoid the worst of reefer madness
So…you want to invest in marijuana stocks? Well, step right up and get in line behind the thousands of other equally excitable lemmings. Is that rude? Sorry. In truth, I understand.
You’ve seen the crazy returns. You’ve suppressed pangs of jealousy while watching your neighbour, whose financial plan once consisted of recycling beer bottles and thinking magically, tool around the block in a brand-new Jag. You know the origin of this newfound wealth. And you want in. Yet how to access this world of opportunity?
You could invest in specific stocks. But when you consider that “profitable cannabis companies” is just another way of saying “hen’s teeth,” you may want to think carefully about buying individual equities. In fact, you might want to spread your risk around. But how? Perhaps by opting for a cannabis exchange-traded fund (ETF).
Before we go any further, a disclaimer: I am uniquely positioned to give financial advice. By this I mean that I am uniquely unsuited. At the risk of stating the obvious, taking financial advice from a cannabis columnist is like accepting medical treatment from a cannabis columnist. (You should probably know that my management strategy for the common cold involves bloodletting with giant river leeches, then drilling a large hole in the patient’s skull to let the black humours escape.) So, you know, just don’t.
When it comes to marijuana ETFs in Canada, you won’t be overwhelmed with choice. As of this writing, if you, um, weed out duplicate ETFs hedged to the greenback, there are really just six available, including two newbies that launched only in mid-April. (Both of the new ETFs focus on the U.S. market. Because neither has a meaningful track record, we’re going to ignore them for now.) But as with ETFs generally, all are not created equal, and significant differences in investment philosophies—passive versus active management, for one—have likely played a large part in their returns so far.
When most of us think about ETFs, we assume that their intent is to track the return of its underlying index as closely as possible. Two of the four major ETFs, both from Toronto-based Horizons Exchange Traded Funds, attempt to do this. The Horizons Marijuana Life Sciences Index ETF, the world’s first cannabis ETF, tracks the North American Marijuana Index, while the Horizons Emerging Marijuana Growers Index ETF tracks the small-cap Emerging Marijuana Growers Index. Both are rebalanced quarterly.
The other two established marijuana ETFs take an actively managed approach. Like all weed funds, the Evolve Marijuana Fund seeks to capture “long-term capital appreciation” by investing in cannabis companies and ancillary businesses—Shopify, for example, was among its top 10 holdings as of early May. The other actively managed pot ETF, the Purpose Marijuana Opportunities Fund, is similarly positioned, with exposure to cannabis producers, tech, media, real estate and other sectors. Unlike Horizons’ passively managed funds, these two ETFs don’t try to mirror the value of an index; rather, by actively adjusting the contents and weighting of their holdings, they aim to outperform the relevant marijuana indexes, not just track them.
How have they fared? As you might expect in a hyped-up market where valuations swing wildly, the actively managed ETFs have done better overall. Of the two funds listed on the Toronto Stock Exchange, the passively managed Horizons Marijuana Life Sciences Index ETF gained almost 20 percent for the 12 months ended May 22; the active Evolve Marijuana Fund, however, gained almost 70 percent during the same stretch. Compare this to the S&P/TSX Composite Index, which sputtered and coughed its way to a roughly 2-percent return.
Double-digit returns make investors salivate. But like with the dot-com run-up and, more recently, the wacky bitcoin ride, the upside in marijuana investments is much more about potential and PR than it is about balance sheets.
So as always, caveat emptor. That’s Latin. For “hen’s teeth.”