A Guide to Marijuana ETFs in Canada
Find out about the legal and market status of the Cannabis industry in Canada and the US, and how Canadian investors can get on board with Marijuana ETFs.
The marijuana industry in North America has gained a lot of traction over the past decade with expanded legalization of medical and recreational use. Its solid case in treating chronic symptoms and its "amusing" effects among young generations have led dozens of producers and stores to pop-up and cater for the growing demand. Stakeholders in the industry have grown to include legal cultivators and producers, consumers, independent industrial standards bodies, ancillary products and services, regulators and researchers.
In this article, we highlight the legal and market status of the Cannabis industry in Canada and the United States, and how Canadian investors can get on board with Marijuana ETFs.
Marijuana legal status in North America
What’s the legal status of Marijuana in Canada?
Canada first legalized cannabis for medical use on July 30th, 2001, with the passage of the Marijuana for Medical Purposes Regulations, which was later updated to the Access to Cannabis for Medical Purposes Regulations in 2016. On October 17th, 2018, cannabis became legal in all provinces and territories for adults 18 and over, making Canada just the second country (Uruguay first) to legalize recreational use of the drug.
What’s the legal status of Marijuana in the United States?
On the federal level, all marijuana use remains illegal. The federal government classifies marijuana, along with heroin and LSD, as a Schedule I drug with a high potential for abuse and little to no medical benefit. However, things are different at the state level. In California, medical marijuana was legal since 1996 and then was fully legalized (Medical and Recreational) in 2016. Today, medical marijuana is legal in the District of Colombia and 38 other states, while only 19 states and D.C have legalized recreational use. Learn more here.
Recent legislative updates in the US
On November 15, 2021, Republican Representative Nancy Mace of South Carolina introduced legislation to federally decriminalize marijuana, hoping to regulate it similarly to alcohol and prohibit its use for anyone under 21 years of age.
The measure will not alter local-level restrictions, meaning that states would be in control of their own marijuana statutes. Mace faced criticism from her home state, some of whom vowed to counter any effort toward legalization.
North American marijuana market overview
According to 2021 Report by Prohibition Partners, legal marijuana sales in North America reached US$18.1 billion in 2020 and is projected to rise to US$39.1 billion by 2025.
Legal recreational sales in Canada were estimated at US$1.58 billion in 2020, while US sales were seven times higher at US$10.89 billion. Thus, total sales in North America were around $12.48 billion. By 2025, Prohibition Partners expects North American sales of legal adult-use cannabis to reach US$30.47b, representing a cumulative annual growth rate (CAGR) of 16% from 2020.
As for medical marijuana sales, Prohibition Partners estimates that the total North American medical cannabis market reached sales of US$5.6b in 2020. It was estimated that 2020 medical marijuana sales were US$260.0m in Canada and US$5.4b in the US. Overall, North American medical marijuana sales are expected to reach US$8.6b in 2025, representing a CAGR of 7% from 2020.
Investing in marijuana stocks is a bumpy ride
The emergence of cannabis companies in the U.S. and Canada and their long-term growth potential upped investors' interest in getting a piece of the action. However, investing in weed stocks is not for the faint-hearted. It's a bumpy ride infested with risk bugs that arise from the high fragmentation of the industry, oversupply, mostly poor financial results, shareholder dilution and legal issues.
In addition, some of these stocks experience a GameStop/AMC moment, following a targeted social media campaign by the so-called "Reddit Traders". These retail traders influence the price of certain stocks by rallying other retail traders on the internet to pump prices to largely abnormal levels. Prices often tank shortly, leaving bandwagoners with huge losses.
For investors willing to take on the risks, here's a list of cannabis stocks to look at. Enthusiasts can also follow cannabis stock news on New Cannabis Ventures, the website contributes original content and provide quality news on only the most promising cannabis companies. They have also created a Global Cannabis Index that represents the overall publicly traded market for the medical and legal marijuana sector. Since inception in 2013, the index fell by -63% after peaking by +761% in March 2014. Year-to-date, the Index price has fallen by -13.4%.
Overview of Canadian Marijuana ETFs
Diversification is key to dampen risks associated with the volatility of cannabis stocks, and Exchange-Traded-Funds (ETFs) can be the perfect tool. ETFs give investors exposure to a basket of pure cannabis and other cannabis industry-linked stocks that are set to benefit from the effect of future catalysts.
ETF providers in Canada understand the potential upside of the marijuana industry in North America and its popularity among young investors. Therefore, 5 ETFs have been available for trading in Canada with combined assets of CA$ 450 million. Year-to-date, these ETFs witnessed outflows of $CAD 40 million and generated negative returns. The pendulum can swing with legalization of Marijuana in other U.S. States or at the federal level, not to mention the potential consolidation in the industry (mergers & acquisitions).
Top 5 Marijuana ETFs in Canada
- Horizons Marijuana Life Sciences Index ETF: CA$ 371 million
- Horizons US Marijuana Index ETF: CA$ 20.6 million
- Horizons BetaPro Marijuana Companies Inverse ETF: CA$ 8.42 million
- Purpose Marijuana Opportunities Fund ETF: CA$ 7.80 million
- Horizons BetaPro Marijuana Companies 2x Daily Bull ETF: CA$ 5.8 million
Investing in the largest Canadian Marijuana ETF
Horizons Marijuana Life Sciences Index ETF or HMMJ is the world's first Marijuana ETF and the largest Canadian Marijuana ETF with close to CA$371 million in assets under management (AuM). The fund invests in North American (Canada 48.6%, United States 47.3%) publicly listed life sciences companies with significant business activities in the Marijuana industry including biopharmaceuticals, medical manufacturing, distribution, bioproducts and other ancillary businesses to the Marijuana industry.
HMMJ top 10 largest holdings constitute 85% of the total portfolio (40 holdings) and include:
- Innovative Industrial Properties (18.51%): American company that owns and leases industrial real estate assets, while focusing on the acquisition, disposition, construction, development, and management of industrial facilities leased to tenants in the regulated medical-use cannabis industry.
- Tilray Inc. (15.49%): Canadian pharmaceutical and cannabis company that focuses on cannabis research, cultivation, processing and distribution.
- Cronos Group Inc. (10.01%): operates as a diversified and vertically integrated cannabis company. Cronos offers production and distribution platforms of medical marijuana, as well as cultivates cannabis oil
- ScottsMiracle-Gro (9.6%): Scotts Miracle-Gro Company is an American multinational corporation that manufactures and sells consumer lawn, garden and pest control products.
- Canopy Growth Corp. (9.55%): Canadian company engaging in the production and sale of medical cannabis and other related consumer products.
- Jazz Pharmaceuticals PLC (9.45%): Irish biopharmaceutical company, identifies, develops and commercializes pharmaceutical products for various unmet medical needs in the United States, Europe, and internationally. Early in 2021, the company acquired GW Pharmaceuticals, maker of the first drug derived from the cannabis plant to win approval in the U.S.
- Village Farms Intl. (3.47%): Canadian vertically integrated greenhouse grower in North America. The company’s segments include Cannabis, produce and energy.
- Hydrofarm Holdings Group (3.16%): American group that engages in the manufacture and distribution of controlled environment agriculture equipment and supplies
- GrowGeneration Corp. (2.72%): American company that owns and operates retail hydroponic and organic gardening stores in the United States.
- Sundial Growers Inc. (2.44%): Canadian company engaging in production and marketing of cannabis products for the adult-use market in Canada.
Since inception on April 5th, 2017, the fund generated a cumulative gain of +394.92% and an average annualized loss of -1.01%. HMMJ trades on the NEO Exchange (NEO), Toronto Stock Exchange (TSX) and the Lima Stock Exchange (BVL) and charges an annual fee of 0.85%.
