Author: Alan Brochstein, CFA. 14 JAN 2018
Friends,
Large inflows into two exchange-traded funds (ETFs) reflect substantial interest in the cannabis sector. We have written extensively about the first to begin trading, Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ), which has seen assets swell to C$633mm as of Friday after its debut in early April. Perhaps even more impressive has been the quick increase in the assets of ETFMG Alternative Harvest ETF (MJX), which rose from just $6mm going into its debut the last week of the year to $339m as of Thursday. Ironically, while there isn't a single name particularly leveraged to California legalizing, the driver of investor interest was likely related to the historic event. We suspect that many of the buyers of MJX had no idea what they were buying.
As we described last week, these
ETFs are distorting the market in Canada. We pointed to three names in particular that were benefitting from the inflows, and they were among the worst performers of the week. For those who are investing in cannabis stocks, we believe it will be increasingly important to stay on top of developments at these funds. Beyond paying attention to inflows and outflows and being aware of the names that are particularly heavily weighted relative to the size of their shares outstanding or, better, their float, investors should be aware of the quarterly rebalancing dates.
This week, two more ETFs in Canada filed preliminary prospectuses, including Horizons. Their second fund, the Horizons Junior Marijuana Growers Index ETF, which will trade on the NEO Exchange with the symbol "HMJR", will be focused on smaller companies ($50-500mm market cap) and, unlike HMMJ, it will include companies with operations in the United States (primarily cultivation, production and/or distribution). The fund will invest up to 20% of its assets outside of North America. A fourth fund, The Marijuana Fund, is planned by Evolve. "SEED" will be actively managed and is expected to include both Canadian and U.S. companies. The preliminary prospectus was light on details.
While we were critical of HMMJ initially, we note that it has improved, with better diversification and less reliance upon names that aren't particularly leveraged to cannabis. MJX, on the other hand, is exceptionally poorly constructed. It may also face an issue with its custodian, as it converted its failed Latin American Real Estate fund, allowing it to at least temporarily bypass what has been a challenge for competitors in getting a custodian on board. We recall highlighting BNY Mellon signing on to be the custodian for First Trust in late May only to see them drop the fund two days after we published. For now, expect ETFs to be focused primarily on Canadian companies, as federal illegality scares off the trustees.