Create Your Own Cannabis ETF

Written by Nick Hodge
Posted March 29, 2017 at 2:23PM

With pot stocks heating up fast, investors have been clamoring for a marijuana ETF — a way to put money into the sector with a single vehicle.

There’s just one problem with that: a pot ETF doesn’t exist... yet.

But there will be at least one, of course.

Whenever there’s a hot or niche sector that the public wants in on… an exchange traded fund is sure to be created for it.

And let’s face it — the cannabis sector is hot, with legal sales projected to grow from $7 billion last year to $22 billion in 2021. That's a compound annual growth rate of 26%, which makes it an investment no-brainer.

Only eight states have legalized it recreationally so far, but many advisory firms are saying it will be less than five years until all 50 states go legal.

But with no cannabis ETF just yet, how can you get in?

Cannabis ETF Coming

In Canada, the Toronto Stock Exchange has conditionally approved the Horizon’s Medical Marijuana Life Sciences ETF. It is scheduled to debut on April 5th under the ticker HMMJ and, according to Horizon, would be the first ETF “that offers direct exposure to North American-listed stocks that are involved with medical marijuana bioengineering and production.”

That fund would be based off the North American Medical Marijuana Index by Solactive.

Here in the U.S., the ETF Managers Trust has filed paperwork with the SEC to establish the Emerging AgroSphere ETF, which would track a group of 69 companies involved in medical marijuana and industrial hemp. It’s not yet clear if that ETF will be approved.

There’s also the American Growth Fund Series Two E (AMREX), which is a marijuana mutual fund, not an ETF. The fund states that its portfolio “is made up primarily of common stocks involved, in at least some way, in the legal cannabis business.” But be careful: the fund charges a 5.75% sales load, a 1% expense ratio, and a 0.3% 12b-1 fee (whatever that is).

There are other caveats when it comes to marijuana stock funds as well. As Jacob Capital Management Head of Research Khurram Malik told the Business News Network this week, cannabis ETFs might not be the pure play investors are after:

“The tricky thing is, can you put enough constituents to put into the ETF to meet those really strict requirements in terms of liquidity hurdles, in terms of market cap hurdles, et cetera.”

And that’s sort of the problem.

With marijuana still not legal at the U.S. federal level or in all states… exactly which companies meet the regulations necessary to be included in a major exchange-listed fund?

Just this month the Securities and Exchange Commission filed a complaint against a California company claiming to be a leader in the marijuana industry while it was booking sham revenue.

Curate Your Own Cannabis ETF

For now, I think the best solution is to curate your own cannabis ETF. That is, you should select a handful of the current best-in-breed stocks based on due diligence to get a foothold in the space.

One way to do that is to take a look at Solactive’s North American Medical Marijuana Index. It currently contains 16 companies that must meet the following criteria:

...the company is a producer and/or supplier of medical marijuana and/or medical cannabis, biotechnology companies that are engaged in research and development of cannabinoids, companies that offer hydroponics supplies and equipment clearly aiming to increase efficiency in marijuana cultivation and companies mainly engaged in leasing property to medical-use cannabis growers.

But that still leaves you with no exposure to the recreational cannabis market, which is set to boom. In fact, the recreational market in Canada is expected to go fully legal as soon as next month.

Ahead of that, we’ve put together a fully researched list of marijuana stocks that operate in both the medical and recreational segments of the market and that you can buy today.

The full list currently contains nine marijuana stocks that you can use today to create your own cannabis ETF.

We outline three of them here.

Call it like you see it,

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Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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