Marijuana Investors — Mark This Date

Written by Adam English
Posted December 4, 2017 at 7:00PM

If you have any interest in marijuana investing, pay attention to a unique event on December 26th.

Something is going to occur that never has before, and it isn’t going to be a straightforward affair.

ETFMG, the issuer of the existing Tierra XP Latin America Real Estate ETF (NYSEArca: LARE), is converting the listing into the Alternative Agroscience ETF.

As that happens, the first genuine U.S.-listed marijuana ETF will start trading.

But this is a messy situation, and there could be a whole lot of bad to go along with what should just be a whole lot of good.

Here is what investors, whether they are interested in the ETF or not, should know.

What We Know So Far

Based on the information provided to the SEC regarding the complete overhaul:

  • The ETF will consider companies if they derive more than 50% of their revenue from cannabis-related activity, and can include tobacco producers and cigarette manufacturers.
  • The included companies must “engage in the lawful creation or marketing of prescription drugs that utilize cannabinoids as an active ingredient and engage in the creation, production and distribution of fertilizers or pesticides to be used in the cultivation of tobacco and that can be used in the cultivation of cannabis.”
  • And here is the big one — It will also only consider companies that possess all necessary permits and licenses to legally grow cannabis under all local and national laws governing the companies.

That can only mean one thing: Although the ETF is U.S.-listed, it is not going to include a single U.S.-based company. At least not in the foreseeable future.

Canadian stocks are going to almost exclusively represent actual marijuana growers and retailers in the fund.

What We Don’t Know

Here is where it gets ugly. We don’t know:

  • Which specific companies will be held
  • What limitations are placed regarding size, revenue, or anything else of companies eligible
  • The assets the ETF will hold to invest when it launches
  • If the 0.79% fee will be maintained
  • What existing LARE investors are going to do about this, especially in the legal sense

Those are a lot of make-or-break issues.

The change is legal, that we know, but that doesn’t mean current investors are just going to live with it.

The Tierra Funds website for LARE made no mention of the impending overhaul until the end of October, and the pop-up window that mentions the change is extremely sparse on details.

The “News” frame on the website is completely empty as well, somehow. It really doesn’t pass the smell test, and all but sets up a class action lawsuit.

Even if a lawsuit isn’t filed, we can still expect virtually all existing funds to be pulled out of the fund. After all, investors seeking exposure to Latin American REITs probably aren’t going to just blindly go along.

Should You Invest?

So what’s the point of all this risk that ETFMG is taking?

First off, it wants to pull the plug on a product that probably isn’t viable. LARE only has about $6 million invested in it and under $100,000 in average daily volume. 0.79% of that action isn’t much.

Second, changing an existing ETF is much cheaper than attempting to create a new one.

And finally, it is trying to get the “first mover” advantage in the U.S. market.

ETFMG undoubtedly saw how well the Canadian marijuana ETF, the Horizons Medical Marijuana Life Sciences Index ETF, (HMMJ.TO) has done and wants in on that action.

Since its debut in April, HMMJ has built itself up to C$171 million in net assets.

So, ultimately, the question is: Will this first-mover advantage be worth all the risk to us?

Absolutely not.

After all, this is an ETF. Performance will be tied to an index of underlying stocks, and investments in LARE will gain value based on the performance of those companies alone. You can own shares of any and all companies that it will track, and you can do that today.

Down the road, maybe it’ll be a worthwhile investment for U.S.-based investors interested in a low-fee basket, but you’d gain nothing you couldn’t have right now.

Plus, the kind of growth that the marijuana sector is seeing right now doesn’t lend itself to broad baskets of stocks.

The sector is growing faster than internet stocks did back in the early 2000s, and just like back then, growth won’t come across the board. The best companies will become giants. The rest will fade to zero.

This is the kind of investment that rewards due diligence, extensive research, expert analysis, and targeting specific companies.

What happens on December 26th will be fascinating, but be comfortable watching that from the sidelines.

Instead, go straight to the source of the fantastic growth that LARE’s issuer is trying to capture fees from — the best companies in the sector.

Take care,

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Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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