Marijuana ETFs Blaze Higher

November 16, 2021

Cannabis ETFs were blazing after Representative Nancy Mace (R-SC) tweeted that she plans to unveil a new bill that would legalize marijuana at the federal level. The bill would remove the plant from the list of federally controlled substances.

While cannabis-related ETFs have been on a decline for much of the year, this news was enough to lift them by double digits during the week of Nov. 8. The U.S.-focused AdvisorShares Pure US Cannabis ETF (MSOS) gained 14.0%. The AdvisorShares Pure Cannabis ETF (YOLO) and the ETFMG Alternative Harvest ETF (MJ), which take a global approach, were up 12.8% and 10.9%, respectively.

Cannabis-related ETFs shot higher after Joe Biden’s nomination. Both he and Vice President Harris had stated they were in favor of policy reform. President Biden, however, has only backed medical legalization and decriminalization.

The lack of movement on the issue after Biden took office brought these ETFs off their highs. But Mace’s bill, which would see marijuana regulated similarly to alcohol, could appeal to those on the right side of the aisle because it invokes states’ rights.

The proposed bill would also not call for the degree of regulation or taxation as prior legalization bills have, such as of that proposed by Senator Chuck Schumer.

Several Options Available
There are currently 10 U.S.-listed marijuana ETFs available, with MJ and MSOS being the largest, at over $1 billion in AUM each.

Currently, the cheapest cannabis ETF is the Cambria Cannabis ETF (TOKE), with a 0.42% expense ratio. This is significantly lower than the average expense ratio of 0.71%. The low cost is especially notable when you consider that TOKE is active.

Though it is 0.33% cheaper than the passive MJ, TOKE has underperformed by 4.1% year-to-date.

Using the ETF Comparison Tool shows that there is some overlap in the top holdings between the two funds, though TOKE’s active approach means that this could change.

(For a larger view, click on the image above)

MJ currently holds a 7.7% allocation to the ETFMG Sit Ultra Short ETF (VALT), which is purchased with the proceeds from securities lending collateral. Securities lending can introduce additional risks to the portfolio but can also help offset a higher expense ratio.

Not all ETFs participate in securities lending, so it is important to understand if a fund you hold is incurring this additional risk. This information can always be found in the fund profile under “fund structure.”

Domestic Or Global?
Legalization is not just a domestic issue. In fact, the U.S. has some of the most marijuana-friendly laws around the world. The substance remains illegal in much of the world.

Chart courtesy of ETFMG

(For a larger view, click on the image above)

Though this suggests there is substantial growth ahead for global cannabis-related companies, current legalization talks in the U.S. are likely to benefit domestically focused ETFs such as MSOS the most.

Leveraged Play
There is also a leveraged way to play this area of the market. The MicroSectors Cannabis 2x Leveraged ETN (MJO) offers 2x leveraged exposure to North American cannabis companies that are selected and weighted by market cap.

Rather than holding a basket of equities, ETNs are debt notes issued by a bank. Unlike ETFs, this means they are exposed to counterparty risk. However, ETNs do have some benefits of their own.

As the name suggests, MJO has significantly more volatility than a fund like The Cannabis ETF (THCX) which also offers exposure to North American cannabis companies. Year-to-date, MJO is up 25.0% compared with just 3.7% for THCX.

But MJO was up 20.6% last week alone, after declining for much of the year. The fund had fallen by 39.3% from Feb. 10 through March 8., while THCX had only sunk by 29.3% in the same time frame.

Leveraged plays can be beneficial for those who have a strong conviction on near-term price movements for a certain area of the market. However, the risks rise for those who hold leveraged funds long term.

With so many different ETFs offering exposure to cannabis, investors can pick and choose among them to select the fund that offers their desired approach to the space.

Contact Jessica Ferringer at jessica.ferringer@etf.com or follow her on Twitter