With Canada set to legalize the recreational use of marijuana on October 17th, marijuana-related stocks and thus marijuana ETFs built around these equities have been on the rise. Many investors believe the marijuana industry will the next big growth industry since the drug has never been legal, but known to be rather popular with those looking to relax. Not only have individual investors been looking to the industry as a way to grow their wealth, but the alcohol industry has recently shown serious interest in the industry.
In August we saw Constellation Brands (STZ) increase its stake in Canopy Growth (CGC), we saw Molson Coors (TAP) partner up with Hydropothecary Corp. (HEXO) and there were reports that Tilray (TLRY) was in talks with Diageo (DEO). The rumors that Diageo and recently IPO’d Tilray where in talks has helped TLRY jump more than 100% since going public in mid-July of this year. While the moves from TLRY, HEXO, and CGC have all been astonishing in the past few months, the fact remains that the industry as a whole can still go higher in the future.
When marijuana became legal in Colorado and then California, the industry experienced a significant increase in demand literally overnight. That demand is once again going to jump on October 17th when Canada becomes legal. Furthermore, with the trend appearing to be taking hold not only around the country but the world, it's not hard to see how within maybe the next five to ten years from now, some of the marijuana stocks will be as big as the top alcohol companies.
But, that is where the problem rests. Trying to determine today, which companies are going to dominate the marijuana market in the coming years is not only a daunting task but perhaps more like gambling than investing.
Luckily though, we have a few ETFs that you can pick from today. The benefit of buying an ETF over an individual stock is that you have exposure to a broader number of companies and therefore you don’t have to pick the industry winners and losers today. You can buy a basket of marijuana stocks knowing that you will make money no matter which companies dominate the industry in the years to come and which ones burn out.
The top two marijuana ETF’s today are the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences ETF (HMMJ). While HMMJ has been in existence for longer, it is traded on the Toronto Stock Exchange, meaning it may e difficult for some US-based investors to buy shares. But you shouldn’t worry if you fall into that category because MJ is traded on the New York Stock Exchange and when looked at under a microscope, the funds holding looks incredibly similar. Furthermore, MJ is more diversified than HMMJ; MJ’s top ten holdings represent 59% of assets while HMMJ’s top ten holdings make up more than 78% of assets under management.
MJ also has a lower expense ratio, just 0.75% compared to 0.94%, but has about half as much in assets. HMMJ has roughly $730 million in net assets compared to $435 million. HMMJ also pays a higher dividend yield, 5.61% compared to just 2.59% for MJ.
What is interesting though is that while both funds have performed very well over the last month, up 29% for MJ and 31% for HMMJ, neither fund is up year-to-date. Part of that poor year-to-date performance is likely due to the big increase marijuana stocks experienced leading up to the State of California legalizing marijuana on January 1st of this year. That is important because we could be seeing the same type of move higher now as investors flood into these stocks before Canada becoming legal.
Although if that is the case, it may not be all that bad because you can still buy in now and ride the wave higher until October 17th and then sell, or decide you want to be a long-term investor in this industry and continue to hold your marijuana ETF even after Canada makes its change. Personally, I am someone who thinks the latter option sounds better.
Regardless though of what you decide, just remember that new legal industries aren’t created every day, and thus this may not be a time you want to sit on the sidelines.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold positions in any company or equity mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
