Looking for the right cannabis ETF to add to your portfolio? Be sure to follow these tips, so your profits don’t go up in smoke.
Before we get into buying a cannabis ETF for your portfolio, let’s take a quick look at the history of marijuana, why it was or is illegal, and why many countries and states in the U.S. are rethinking that classification. You see, marijuana, or cannabis, wasn’t always illegal. The plant had medicinal and industrial uses, and doctors in the U.S. often prescribed it to treat stomach aches, migraines, and vomiting.
Then politics came into the picture. It’s an eye-opening story, but the essence is that, in order to curb immigration from Mexico, states began to outlaw marijuana. By 1931, 29 states had laws that criminalized the use of marijuana. Then the Marijuana Tax Act of 1937 so strictly regulated the plant that it was essentially prohibited in the U.S.
In the 1970s, the Controlled Substances Act listed marijuana as a Schedule I drug. Along with that came stiff legal penalties for possession and distribution of marijuana. This was all despite the fact that there was little evidence supporting its classification as a dangerous substance.
In other words, marijuana was in common use for medicinal, recreational, and industrial purposes until approximately 100 years ago. That’s changing slowly, with California approving marijuana for medical usage starting in 1996. Since then, Canada’s Cannabis Act of 2018 legalized marijuana across the country, and in the U.S., only a small handful of states have refused to legalize it in any form. What does all this mean for investors?
What to look for in a cannabis ETF
It’s only in the past few years that you could even consider buying cannabis ETFs. And honestly, the industry was so volatile that you probably didn’t want to buy into it anyway unless you had nerves of steel. Even today, individual cannabis stocks can be pretty up and down. That’s not to say there aren’t some good buys out there, but you still need to keep a watchful eye on things.
As an industry, however, things are looking up, at least over the long term. Retail sales of cannabis products are expected to triple by 2024 as more states legalize marijuana, and the industry is beginning to mature.
So, for some people—mainly investors who can’t handle that volatility, or who don’t have assets enough to diversify properly—we recommend investing in marijuana index funds and ETFs (exchange-traded funds) that own a whole bunch of the best stocks in the industry. That way, you avoid the occasional train wreck, while still participating in the incredible growth of the sector.
What do you look for in a cannabis ETF? Momentum is certainly key, as with any individual stock. Beyond that, since ETFs are managed, at least to some degree, look at the expense ratio. When stocks (and the ETFs that invest in them) are up big in a year, it’s easy to shrug off an expense ratio of 1%. But when your investment is up only 5%, and then management takes 20% of your gains away, that hurts. So don’t overlook the expense ratio.
One easy way to evaluate an ETF selection is to look at a site like Morningstar. Morningstar rates ETFs with their 1-5 star system, based on the fund’s past performance, the fund manager’s skill, risk- and cost-adjusted returns, and performance consistency. The ETFs are normally evaluated for up to three time periods: three, five, and 10 years, and then combined to create an overall rating for the fund. However, no cannabis ETF dates back 10 years, and most of them haven’t even been around five years, so their ratings will more heavily reflect recent performance.
5 of the biggest cannabis ETFs on the market
The traditional reasons for buying an ETF are that you can avoid the risk of investing in any one stock but still benefit from the sector’s growth—and the marijuana sector is certainly growing, even if things do pull back from time to time.
While the future of the overall industry looks promising, always bear in mind that even ETFs come with risks. The ETFs here are all positive as we’re writing this, but some of them have negative returns since inception. They are, however, the biggest cannabis ETFs out there, which is why we’re listing them.
Cannabis ETF #1: ETFMG Alternative Harvest (MJ)
ETFMG Alternative Harvest was the first marijuana ETF in the U.S., and has $2 billion in total assets. Alternative Harvest ETF’s top 10 stocks include several stocks in the cannabis sector, such as Tilray Inc (TLRY) and GrowGeneration Corp (GRWG). Still, the fund also strays a bit from the marijuana space. Its holdings also include a bunch of tobacco companies, such as Philip Morris International Inc. (PM) and Altria Group Inc (MO).
Cannabis ETF #2: AdvisorShares Pure Cannabis ETF (YOLO)
U.S.-based AdvisorShares Pure Cannabis has $378 million in assets. It currently holds over 28% of its assets in BlackRock Liquidity Funds Treasury Trust Fund Institutional Shares (TTTXX), which primarily holds U.S. Treasury bills. The second-largest holding is Village Farms International Inc (VFF), which does produce cannabis products, but also markets and distributes tomatoes, bell peppers, and cucumbers, and includes a subsidiary in the energy sector.
Cannabis ETF #3: Global X Cannabis ETF (POTX)
Global X has $185 million in total assets and a management fee of 0.50%. This ETF, started in September of 2019, may be one of the most cannabis-focused of the cannabis ETFs. Nine of its top 10 holdings are very firmly in the cannabis industry. That includes GW Pharmaceuticals PLC ADR (GWPRF), OrganiGram Holdings Inc (OGI), and Tilray.
Cannabis ETF #4: The Cannabis ETF (THCX)
The Cannabis ETF has $161 million in assets and does hold some bonds, but most of its top 10 holdings are specifically in the marijuana sector. Names like Tilray, Village Farms, GrowGeneration, Cronos Group Inc (CRON), and Canopy Growth Corporation (CGC) are all here.
Cannabis ETF #5: Amplify Seymour Cannabis ETF (CNBS)
Amplify Seymour Cannabis ETF has $147 million in assets and a fairly average management fee of 0.65%. The fund opened in July of 2019. Among the top 10 holdings is Dreyfus Government Cash Management Fund Institutional Shares (DGCXX), a mutual fund that invests in “securities issued or guaranteed as to principal and interest by the U.S. government.”
The explosive growth of marijuana investing and this industry is undeniable. And it’s better to jump in early as many are capitalizing on the unmatched growth of this sector. But do choose carefully.
If you aren’t already, consider subscribing to my Cabot Marijuana Investor advisory, where I try and help you navigate the booming sector and determine which cannabis stocks are most likely to produce great returns. So far, it’s worked splendidly – the average return of the 11 stocks I’m currently recommending to subscribers is 324%!
A click here will get you started.
Have you invested in any cannabis ETFs? How have they performed for you?
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More