Cannabis has long been more associated with reducing rather than inducing anxiety among users. But investing in the burgeoning medical marijuana industry is not for the faint-hearted, according to one proponent.
Steps to legalise marijuana have some investors hooked
Cannabis has long been more associated with reducing rather than inducing anxiety among users. But investing in the burgeoning medical marijuana industry is not for the faint-hearted, according to one proponent.
“You better make sure you have charged the batteries in your pacemaker,” says Steve Hawkins, chief executive of Canada-based Horizons ETFs, which runs one of the two most successful marijuana exchange traded funds in the world.
Investors in his fund, the C$1bn ($750m) Marijuana Life Sciences Index ETF, have had a turbulent ride. A $10,000 investment at the fund’s launch in May 2017 was worth $25,750 by last September. This then plunged to $15,494 by the end of 2018 but has since recovered to about $24,000.
The ETF’s performance reflects the choppy nature of the nascent legal cannabis trade.
“There is so much speculation in this infant market that stocks can go up 20 per cent in seconds — it’s extremely sensitive,” Mr Hawkins adds.
Investors have not been put off by its volatility. The Horizons fund is one of the 20 largest ETFs in Canada, and on course to become the second most profitable for its operators due to its expensive 0.75 per cent annual management fee.
A similar product in the US, the ETFMG Alternative Harvest ETF, broke through the $1bn barrier in February. Both funds began in their current form less than two years ago and charge investors a similar fee of 0.75 per cent — which is also especially costly for an ETF.
The rapid rise in funds committed to these two funds highlights the attraction of thematic ETFs, in particular products centred on the fast-developing cannabis industry.
“We were very surprised by the success of the ETF,” says Mr Hawkins. “We sold out our C$10m of seed capital within nine minutes of listing. It was over C$100m in the first few days.”
ETFMG experienced a similar surge in interest when it turned a small Latin American property fund into the marijuana-focused Alternative Harvest fund in December 2017. In just over a year, it grew from $5.7m to more than $1bn.
“There was this tremendous pent-up demand,” says Sam Masucci, chief executive of ETFMG. The increased interest coincides with governments around the world becoming more open to legalising cannabis.
Canada last year became the second country in the world, after Uruguay, to legalise recreational cannabis use. Ten US states and Washington DC have legalised the drug for recreational use and more than 30 for medical use. In December last year, the US passed a federal bill that legalised hemp, a type of cannabis plant, and allowed growers to qualify for crop insurance and research grants.
Bank of Montreal predicts the global marijuana industry could grow to be worth C$194bn by 2025 should the US, Latin American and European countries follow Canada’s lead and legalise medicinal and recreational use.
More than 60 per cent of Alternative Harvest’s assets are invested in Canadian companies, with less than a quarter in US stocks. Yet Mr Masucci expects the US to become a much bigger player in the global marijuana industry. He says two recent bills give him hope that a US market will flourish, while he expects politicians from both the Democrats and Republicans to respond to rising acceptance of cannabis use among US citizens.
“There is so much momentum — more than 90 per cent of Americans believe it should be legalised for medical use and 75 per cent for recreational use,” he says.
But the fast rise of the marijuana industry and the volatility of valuation of assets in the sector have led some commentators to draw parallels with the rise of bitcoin, the cryptocurrency that has become synonymous with extreme price fluctuations. Bitcoin has also attracted much interest from ETF providers. Advocates of investment in cannabis argue this is a mischaracterisation.
“There are some similarities, both are high growth and both have the potential to disrupt,” concedes Stephen Murphy, managing director of European Cannabis Holdings, an investment group. “But it stops there. The diversity of applications of cannabis makes the scale of opportunity far superior.
“Not only is it tangible, cannabis is widely recognised for its therapeutic, medical and wellness properties, let alone looking at social, industrial, financial and political potential.”
He adds that cannabis also offers a greater spread of investment opportunities than bitcoin and the sweeping legalisation globally means it is becoming rapidly more accepted as an industry.
Investors in the ETFs are typically individual retail investors. The average allocation in the Harvest fund is $1,800, while investors typically have between C$3,000 and C$5,000 in the Horizons fund.
Mr Hawkins says some institutional investors have made commitments, while hedge funds also use the ETF as a trading tool to get short-term exposure to the market.
The volatility of the cannabis industry has drawn speculative investors, with many taking short positions in anticipation of falling share values.
In response, Horizons plans to launch two marijuana ETFs that are designed specifically for traders. One would use leverage, or debt, to double investors’ exposure to the market, while another is designed as an “inverse” ETF, which would move in the opposite direction to the sector for those with a contrarian view.
“Most investors in this space are long-term focused but we know there are also investors who want to trade on its volatility,” Mr Hawkins adds.
