3 Marijuana ETFs to Buy (and 2 More Coming)

marijuana

Marijuana ETFs are a good, lower-risk way to play the cannabis boom without investing in individual marijuana stocks. I’ll get to the pros and cons to investing in ETFs vs. stocks in a minute, but first I want to talk about timing as it pertains to the sector.

In the long run, marijuana stocks are clearly trending up; this is the fastest-growing industry in North America, as the medical marijuana market booms and the recreational black market transitions to legal.

But these stocks are particularly volatile, so in the short run, if you’re not careful, you can lose a lot of money. And the best way to lose money is to buy when the news is great!

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Fact 1. Marijuana stocks peaked way back in January 2014 after California voted to legalize.

Fact 2. Marijuana stocks peaked in January 2018 when California’s legalization became effective.

Fact 3. Marijuana stocks peaked in October 2018 when recreational marijuana became legal across Canada.

So if you want to make money in the sector, the best time to buy is when stocks are down, and that’s difficult without professional guidance—which is one reason to invest in ETFs instead.

Marijuana ETFs to Buy

Two years ago, there were no marijuana ETFs. As I write, there are three available to buy. By the time you read this, there may be four. And before long, there will be five.

Why the sudden explosion?

Because there’s a lot of hot money flowing into marijuana stocks, and the operators of exchange-traded funds (ETFs) want a piece of the action!

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 growth of the sector—and the marijuana sector is certainly growing, even if things do pull back for a bit after today.

However, the flip side to that is that an ETF guarantees performance that is not as good as the best stocks—and we at Cabot specialize in picking stocks. In fact, I’ve recommended marijuana stocks many times here over the past year or so, and investors who followed my advice have done very well.

Also, I’ve published 10 quarterly (now monthly!) issues of Cabot Marijuana Investor, which has a portfolio of 16 marijuana stocks that are up an average of 51% already in 2019!

To learn the names of those stocks, you can sign up here.

Still, for people who want to take the easy route, marijuana ETFs might make sense, so let’s review what’s out there in this explosive market sector.

Marijuana ETF #1: ETFMG Alternative Harvest (MJ)

ETFMG Alternative Harvest was the first marijuana ETF in the U.S.—launched a little over a year ago. ETF Managers Group runs a bunch of very targeted ETFs (15 so far), including ETFs that focus on cybersecurity, mobile payments, video game technology, the drone economy and whiskey & spirits. Of course, not all these narrowly targeted ETFs succeed. Alternative Harvest replaced the Tierra XP Latin America Real Estate ETF (LARE), which no longer exists—for reasons that are not difficult to guess.

Alternative Harvest ETF’s top 10 stocks include six of the stocks that are in my Cabot Marijuana Investor, but the fund also strays a bit from the marijuana space. Its holdings also include a bunch of tobacco companies!

These include Philip Morris International, British American Tobacco, Swedish Match, Scandinavian Tobacco, Universal Corporation, Japan Tobacco, Altria (previously known as Philip Morris Companies), Imperial Brands and Vector Group. I suppose those tobacco companies are in the ETF to provide some balance, and to benefit if/when any of those tobacco companies start to invest in/acquire cannabis companies. But mostly I see them as a drag on long-term performance.

Lastly, there’s the matter of expense ratios, which is basically what you pay management to run the ETF. ETFMG’s other target ETFs seem to have expense ratios capped at 0.75%, and right now MJX’s expense ratio is exactly 0.75%.

Marijuana ETF #2: Teucrium Emerging Medical Agriculture Index Fund (MEDA)

Teucrium runs five future-based ETFs focused on commodities: corn, soybeans, sugar, wheat and a combination of the four. But its new Emerging Medical Agriculture Index Fund will own stocks, while leaning toward the medical marijuana space. The ETF prospectus has been filed, but the ETF is not open yet.

According to the prospectus, the ETF’s holdings might include biotechnology firms that are involved in emerging medical agriculture (cannabis), firms that invest in such businesses, and firms that provide growing technologies and equipment, like hydroponic technologies. Furthermore, the ETF might invest in peripheral areas that support the industry like real estate, media and finance.

As to the cost of management, Teucrium’s current products have amazingly high expense ratios: corn 2.66%, soybeans 2.63%, sugar 1.73% and wheat 2.54%. The ETF that combines the four has an expense ratio of “only” 0.48%, but that’s basically on top of the other ETFs’ expenses. My guess is that the new ETF isn’t going to be cheap.

Marijuana ETF #3: Horizons Marijuana Life Sciences Index ETF (HMLSF) (HMMJ in Canada)

Horizons is a Canadian firm that runs nearly 90 ETFs. Some are passive and copy benchmark indexes, some are active, and some are leveraged. The Horizons Marijuana Life Sciences Index ETF tries to duplicate the returns of the North American Medical Marijuana Index, which generally includes companies located in Canada (74%), the United States (16%) and Great Britain (10%). (How Great Britain got to be part of North America, I have no idea.) The ETF has been in operation since April 2017.

The five largest growers in Canada account for roughly 38% of the ETF’s portfolio. As I write, my portfolio of 13 marijuana stocks includes seven of the top 10 holdings in Horizons Marijuana Life Sciences Index ETF. There are no tobacco stocks. But it’s curious to note the Scotts Miracle-Gro, the relatively conservative lawn-care stock, is the second-largest holding in the ETF’s portfolio!

And there are expenses. The ETF has an annual management fee of 0.75%. And if you live in the U.S., it’s going to cost you even more.

Marijuana ETF #4: Horizons Junior Marijuana Growers Index ETF (HMJR in Canada)

Evolve ETFs is a Canadian company that runs 15 ETFs, including the Automobile Innovation Index (CARS), the Gender Diversity Index (HERS) and the Global Healthcare Enhanced Yield ETF (LIFE). SEED will be an actively managed marijuana ETF. It will be free to invest in any area of industry. And it will even have the option to invest up to 10% of the fund in private companies (digging even deeper into the nursery). To me that spells increased risk.

Judging from Evolve’s current offerings, the ETF’s management fee is likely to be under 1%. And again, U.S. investors will pay more.

Marijuana ETF #5: The Marijuana ETF (SEED in Canada)

Evolve ETFs is a Canadian company that runs 15 ETFs, including the Automobile Innovation Index (CARS), the Gender Diversity Index (HERS) and the Global Healthcare Enhanced Yield ETF (LIFE). SEED will be an actively managed marijuana ETF. It will be free to invest in any area of industry. And it will even have the option to invest up to 10% of the fund in private companies (digging even deeper into the nursery). To me that spells increased risk.

Judging from Evolve’s current offerings, the ETF’s management fee is likely to be under 1%. And again, U.S. investors will pay more.

Which Marijuana ETF is Best?

It’s way too early to say. But I will say a word about fees. When stocks (and the ETFs that invest in them) are up triple digits in a year, as in 2017, 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.

For my money, individual stocks remain the place to invest.

To learn which marijuana stocks I like best, click here!

Timothy Lutts

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*This post has been updated from an original version.

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