Uh-Oh! The Very First Marijuana Stock ETF Is Now in Bear-Market Territory

Weed stocks are beginning to go up in smoke.

Sean Williams
Sean Williams
Jun 19, 2017 at 8:44AM
Health Care

You'd be hard-pressed to find an industry that's delivering a faster and more consistent growth rate than marijuana. It's also why investors have been flocking to marijuana stocks, almost blindly, over the past year. In many cases, pot stocks have doubled or tripled in value over the trailing year.

According to a recently released report from Marijuana Business Daily, entitled "Marijuana Business Factbook 2017," legal U.S. pot sales are expected to jump to a range of $5.1 billion to $6.1 billion in 2017, climb another 45% in 2018, and surpass $17 billion by 2021. Investment firm Cowen & Co. has gone a step further, predicting U.S. legal sales of $50 billion by 2026. If these figures prove accurate, then investing in marijuana stocks could prove fruitful for investors.

Marijuana buds in a jar sitting atop a pile of cash.

Image source: Getty Images.

But there are a number of big risks associated with investing in marijuana, including the fact that most pot stocks are losing money, and many trade on the over-the-counter (OTC) exchanges. Though the OTC exchanges have done an admirable job of improving reporting standards for listing companies, it can still be difficult for investors to get accurate and up-to-date financial info. This makes investing in marijuana stocks all that much more of a gamble.

Yikes, the very first marijuana stock ETF has plummeted

Thus entered the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ), stage left -- until the last few days, it was known as the Horizons Medical Marijuana Life Sciences ETF -- back in early April. 

The first marijuana stock ETF of its kind, the Horizons Marijuana Life Sciences Index ETF allows investors to own more than a dozen pot stocks through a single investment fund. For a 0.75% annual expense ratio, it seemingly gives investors a means to easily spread around their risk. Horizons also recently reported that it's going to allow investors to buy into this ETF with Canadian or U.S. dollars, broadening investor access.

Given the hoopla surrounding pot stocks -- broad expansion potential in the U.S., Canada considering a recreational legalization bill, and Mexico considering the legalization of medical cannabis -- the Horizons Marijuana Life Sciences Index ETF was perceived to be a winner. And very early on it was. Shortly after debuting at $10 Canadian per share, it rallied more than 18% in less than a week. Today, however, is a different story.

A frustrated investor holding a tablet showing large stock losses.

Image source: Getty Images.

As of the close on Friday, June 9, the Horizons Marijuana Life Sciences Index ETF had fallen more than 27% from its all-time high set two months prior, and was down 14% from its debut price back in early April. In other words, based on its move from April 10 through June 9, marijuana stocks and the very first marijuana stock ETF were firmly in bear market territory -- commonly defined as a drop of at least 20%.

Here's why marijuana stocks have entered a bear market

Why are marijuana stocks suddenly going up in smoke? It looks to be a confluence of factors.

To begin with, Health Canada, which runs the country's medical cannabis program, is going to be making some sizable changes going forward. Most notably, there's expected to be an increase in the number of licenses issued for medical cannabis growth and distribution.

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That's potentially bad news for the pricing power and margins for Canopy Growth Corp. (NYSE:CGC), Aurora Cannabis (NYSE:ACB), and Aphria (NASDAQOTH:APHQF), three Canadian-based medical pot growers in Horizon's ETF. It's particularly terrible news for a company like Aurora Cannabis, which is losing money and in the midst of developing an 800,000 square foot grow facility known as Aurora Sky. All three have fallen considerably in recent months, and combined, they comprised 26% of the Horizon Marijuana Life Sciences Index ETF as of June 8.

A cannabis joint in front of the Canadian maple leaf.

Image source: Getty Images.

Additionally, there's concern about just how much expansion cannabis could undergo in the near future. Though Prime Minister Justin Trudeau proposed legalizing recreational weed in Canada, conservatives could put the kibosh on the idea given their concern about kids gaining access to pot and uncertainties about driving while under the influence of marijuana.

Within the U.S., White House press secretary Sean Spicer intimated in February that the current administration would handle recreational pot differently than the Obama administration. This has marijuana-based businesses in the U.S. concerned about their futures.

Investors may have also come to the realization that marijuana stocks simply don't deserve their premiums, especially given that a vast majority are losing money. Considering that further expansion isn't a certainty, investors may have headed to the sidelines.

The recent plunge in marijuana stocks and the decisive move into a bear market for the Horizons Marijuana Life Sciences Index ETF is a clear warning to investors to keep their distance. Unless we see clear change from the U.S. or Canadian government's in their stance toward pot, there's little reason to risk your money by investing in pot stocks.