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The first marijuana ETF is launched in Canada
16
May
The first marijuana ETF is launched in Canada

 

For many it’s been difficult to legally invest in the fast-growing marijuana sector but now a new Exchange-Traded Fund (ETF) allows you to do just that.

Those who believe in the money-making potential of medicinal cannabis can invest in the Horizons Medical Marijuana Life Sciences ETF (HMMJ), which began trading on the Toronto Stock Exchange last month.

At EXANTE, we provide Direct Market Access to 50 worldwide stock exchanges, including the Toronto Stock Exchange, we are now offering our customers the opportunity to invest in this ETF.

Investing in the marijuana sector through an ETF allows you to diversify and is not as risky as investing in a single company in the industry. Obviously, the sectoral risk remains.

The ETF is based on the North American Medical Marijuana Index and is currently made up of 16 companies. Ten of them are based in Canada, where the therapeutic use of cannabis has been legal since 2001. The North American market for medicinal marijuana generated revenues of $6.7 billion in 2016, up 30 percent from the previous year. With Canada tipped to legalize the recreational use of marijuana next year this ETF could become even more potentially lucrative.

The main companies in the ETF are: Aurora Cannabis, Insys Therapeutics, Aphria, ScottsMiracle-Gro, Canopy Growth, GW Pharmaceuticals, Zynerba Pharmaceuticals, Cronos Group, CanniMed Therapeutics, OrganiGram, Emblem Corp, Supreme Pharmaceuticals, 22nd Century Group, Emerald Health Therapeutics, ICC International Cannabis Corp, and The Hydropothecary Corp. Half of the companies in the list account for about 75 percent of the ETF, with each of them making up no more than 11 percent of the total.

The HMMJ ETF began trading at 10 CAD and in the following days reached a peak of 12.40 CAD before retreating to its current level, around 9.60 CAD. And the ETF has already set records compared to others launched in the past few months. Just some include, record average daily volumes and assets under management, which has reached almost 100 million CAD.

Generally speaking, weed stocks are no longer considered as extravagant as they were four years ago when the industry was in its infancy. Although the market is still full of «penny stocks», there are now several companies in the industry with strong long-term potential. Considering that an estimated $150 billion is spent on illegal marijuana every year, there are huge opportunities as more US states and countries legalize cannabis. In fact, most of the stocks in the HMMJ ETF have already recorded double-digit share growth over the past year.

However, it should be noted that many of these companies are yet to turn a profit despite strong sales. This could mean these stocks are trading at high valuations. The average Price to Sales ratio of these stocks is around 20 (Price-to-Sales ratio is calculated by dividing the company’s market capitalization by revenue in the most recent year. The Price-Earnings ratio cannot yet be because these companies have not made any earnings). Such high market ratios could be driven by investors already pricing in exponential sales increases, particularly if recreational use is legalized.

However, if you want to include an ETF like the HMMJ in your portfolio you should keep in mind that in the coming years anything could happen. Investing in such a sector could bring high profits but also carries high risk. The industry is at the whim of governments and it’s still unclear what rules and regulations will be placed around the sale of cannabis.

Canada seems to be a pioneering country with a stable government with very clear ideas about the future of this industry. As other analysts have already said, companies in the marijuana industry can be compared to internet companies that created the dot.com bubble in the late 90s.

Another aspect to consider, if you invest in this specific ETF, is the currency of the security. This ETF is denominated in Canadian dollars (CAD) and therefore has exposure to the EUR/CAD exchange rate. Over the last 17 years the EUR/CAD price range was between 1.75 and 1.21. It is currently around 1.48, which is exactly the midpoint of that price range, and this is not trivial.

Disclaimer: EXANTE is regulated by MFSA, licence number IS/52182. Past performance does not constitute a reliable indicator of future results. Future forecasts do not constitute a reliable indicator of future performance. Contents of this material are provided for information purposes only and do not constitute investment advice. EXANTE assumes no responsibility for any errors, inaccuracies or omissions in the material sources.

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