Marijuana stocks have never been more popular, as investors seek to take advantage of the coming opening of the recreational marijuana market in Canada. Although those who want to invest in marijuana can choose from several individual companies with ties to cannabis, many of those who are more cautious about the sector would prefer to get more diversified exposure through an exchange-traded fund.

There are some ETFs that specialize in marijuana stocks, giving concentrated exposure to the industry. But other ETFs have taken a different approach toward the industry. AdvisorShares Vice ETF (NYSEMKT: ACT) has sought to include cannabis stocks as part of a broader investment objective that includes industries broadly referred to as "sin stocks." However, the guidelines it imposes on cannabis companies before buying shares has weeded out many of the most promising players in the budding space, and that goes a long way toward explaining why the fund's performance is basically flat so far in 2018 -- even as alternatives like the ETFMG Alternative Harvest ETF (NYSEMKT: MJ) have produced double-digit percentage gains year to date.

Nine cigarettes stacked in two rows.

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How AdvisorShares Vice attacks the sin-stock market

The Vice ETF is less than a year old, but its investment objective is one that many investors have used successfully for decades. The most important component of the ETF's strategy is to choose alcohol and tobacco stocks that have historically been successful in using competitive advantages to thwart their rivals and produce steady and consistent earnings growth. Interestingly, the Vice ETF bills itself as a somewhat conservative offering, noting that these sectors of the market have generally been resistant to economic recessions because of the inelastic demand among consumers for alcohol and tobacco.

Yet the Vice ETF also seeks to go a step further. In efforts to "seek emerging, untapped growth opportunities," the fund also seeks to invest in cannabis-related companies. Between the conservative growth of tobacco and alcohol and the potentially aggressive growth of marijuana, the Vice ETF bills itself as a growth fund through and through.

Two reasons the Vice ETF isn't perfect for marijuana investors

As interesting as the Vice ETF's investment approach is, it has a couple of shortcomings for cannabis investors. First and foremost, the share of fund assets going toward cannabis-related stocks is relatively minimal. As of the fund's most recent report, less than 20% of the ETF was invested in cannabis. Tobacco gets a roughly equal 20% allocation, with more than 60% devoted to alcohol-related stocks. Given the poor performance of tobacco stocks and mixed results from the beverage side of the sin-stock universe, that allocation has watered down marijuana's gains.

In addition, the Vice ETF doesn't allow investment in the full range of marijuana stocks. As the fund describes it, it "only invests in cannabis-related companies conducting federally legal business per the United States government." That reflects the ETF's belief that "while cannabis represents a new investment frontier, proper caution and due diligence must be exercised surrounding its regulations and risks."

The net effect of that decision is that most of the Vice ETF's cannabis holdings are in healthcare companies studying the potential beneficial impacts of cannabis-derived treatments, as well as potential retail suppliers that support the marijuana industry. Although some of those stocks have done well, they haven't seen the same gains that Canadian cannabis producers have enjoyed, and that's held back the ETF's relative performance.

Staying focused on the long run

The Vice ETF understands the limitations of its directive on investing only in companies conducting business that's legal under U.S. federal law. But the fund's portfolio managers remain confident that in time, large players in tobacco and alcohol will invest in and integrate cannabis operations within their corporate frameworks. Already, moves like Constellation Brandsdecision to take a major stake in Canadian cultivator Canopy Growth has boosted the Vice ETF's indirect exposure to cannabis, given its position in the beverage giant.

That might prove to be the smart approach to marijuana investing in the long run, but so far, Vice ETF hasn't made its marijuana-focused shareholders particularly happy. With less than $15 million in assets under management, the Vice ETF might have to broaden its scope if it wants to see the same success that more focused marijuana ETFs have achieved.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.