Cannabis ETFs tend to be less risky than stocks. We’ll explore why—and everything you need to know before investing in a cannabis ETF.
What’s an ETF?
An exchange-traded fund (or ETF) consists of a group of securities or stocks designed to track a particular index. ETFs trade on an exchange, and their prices fluctuate as people buy or sell the security.
There are four main ETFs that offer investors exposure to cannabis stocks:
- the ETFMG Alternative Harvest ETF (MJ)
- the Horizons Marijuana Life Sciences Index ETF (HMMJ)
- the Horizons Marijuana Life Sciences Index ETF (HMLSF)
- the Cambria Cannabis ETF (TOKE)
MJ formed in December 2015. It’s designed to track the Prime Alternative Harvest Index. MJ was the first cannabis ETF in the US, and it was also the largest ETF in the world to invest in marijuana stocks. The fund has invested in cannabis companies like Aurora Cannabis (ACB), Cronos Group (CRON), GW Pharmaceuticals (GWPH), Canopy Growth (CGC)(WEED), and Tilray (TLRY).
Both HMMJ and HMSLF belong to the Horizons ETFs Management company. HMMJ formed in April 2017, and it was designed to track the North American Medical Marijuana Index. This fund therefore gives you exposure to North American cannabis companies. The ETF has invested in marijuana stocks like Canopy Growth, Aurora Cannabis, Tilray, and Cronos Group. HMSLF, meanwhile, formed in June 2017. It was designed to track the North American Medical Marijuana Index. This cannabis ETF also invests in cannabis companies like Canopy Growth, Aurora Cannabis, and Cronos Group.
Formed on July 25, 2019, Toke is a US-incorporated fund with exposure to 20–50 cannabis companies around the world. The Toke ETF is therefore an option for investing in cannabis beyond North America.
Performance in 2019
This year, the cannabis sector has underperformed the broader equity market. Year-to-date, cannabis ETFs MJ, HMMJ, HMSLF, and TOKE have returned 1.1%, 4.3%, 6.9%, and -13.5%, respectively, as of September 13. In comparison, the S&P 500 Index and the Dow Jones Industrial Average have increased by 20% and 16.7%, respectively.
Regulatory scandals in the cannabis sector and a wider operating loss for the majority of cannabis companies in their earnings results have led to a fall in cannabis stocks. Also, some of the major cannabis players, like Aurora Cannabis, Canopy Growth, Cronos Group, Tilray, and Aphria, have returned 19.2%, 2.2%, 6.4%, -55.1%, and 14.2%, respectively.
Why cannabis ETFs are lower-risk than cannabis stocks
Since the beginning of 2019, CannTrust Holdings (CTST)(TRST) and Tilray have lost 66.6% and 55.1% of their stock values, respectively. On the other hand, Innovative Industrial Properties (IIPR) has returned 101.2% this year.
So investors who’d invested in CTST and Tilray would have lost a lot of money this year. But IIPR investors would have made a lot of money.
ETFs mitigate stock-specific risks by diversifying investments across a sector. So passive investors who want to take a bite out of cannabis stocks—but who are reluctant to take on a lot of risk—should consider investing in cannabis ETFs.