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Are New Marijuana ETFs Dead on Arrival?

By Dan Caplinger - Jun 12, 2019 at 8:14AM

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Fund managers are still looking at the cannabis space despite recent setbacks.

Investors are still gravitating toward marijuana stocks, especially given their strong performance so far in 2019. With so many companies looking to cash in on the cannabis craze, those who want to pick individual stocks in the space have their work cut out for them as they try to sift out the winners from the wannabes.

Those who don't want to rely on their stock-picking skills often look to exchange-traded funds for help, and the marijuana ETF universe is poised to expand rapidly. In addition to the first-mover ETFMG Alternative Harvest ETF (MJ -2.31%) and the more recently launched AdvisorShares Pure Cannabis (YOLO 1.29%), cannabis investors have a selection of funds from which to choose. Yet even though the more recent interest in marijuana ETFs from shareholders seems lackluster at best, other players in the ETF space are looking to stake their claim to the budding investment niche.

Marijuana leaf on top of a pile of $100 bills.

Image source: Getty Images.

Here comes another marijuana ETF

Fund provider Global X filed a registration statement with the U.S. Securities and Exchange Commission earlier this month to launch a new cannabis-focused fund. Simply named Global X Marijuana ETF, the fund is designed primarily to invest in marijuana-related stocks.

Exactly how a fund defines what makes a stock related to marijuana has been a key differentiator in the past, and Global X selects a relatively broad set of guidelines. The index of stocks that the ETF tracks includes those that are involved in the following:

  • Production, growth, or distribution of marijuana or industrial hemp, as well as extracts or synthetics.
  • Financial services related to such companies, including insurance, property leasing, and investment.
  • Pharmaceutical applications of marijuana.
  • Cannabidiol and cannabis oil products, edibles, topicals, drinks, and related products.
  • Products that facilitate the use and consumption of marijuana.

In addition, the Global X Marijuana ETF requires that any component company must "operate marijuana-related business activities, or supply products and perform services for companies that grow, produce, distribute, or sell marijuana or products derived from marijuana, in a manner that is legal under all laws, rules and regulations applicable to the company's business." Furthermore, the Global X Marijuana ETF reserves the right to exclude any stock even if it's included in the index if the fund advisor determines that the underlying business operates in a jurisdiction in which its operations aren't legal or aren't properly licensed.

Will there be demand?

What's unclear is how much appetite there is for new marijuana ETFs. Alternative Harvest, which was the first ETF to make its debut in the U.S. market, has been highly successful, sporting about $1.1 billion in assets under management after having shifted its investment focus just a year and a half ago.

However, more recent activity in the marijuana market has seemed to cool off demand for new products. The Pure Cannabis ETF has about $58 million in assets under management, and although that's almost quadruple what it raised in assets under management back in April during its first few weeks of existence, it's stayed relatively stuck near its current level over the past several weeks.

It'll all depend on timing

Unfortunately, the success or failure of a new exchange-traded fund often depends on timing. If a new ETF comes out at a poor time for the industry -- as Pure Cannabis saw to some extent following lackluster earnings results from key marijuana companies -- then the upside can be relatively limited. But if the stocks in an ETF's portfolio rise immediately after the fund becomes available to investors, then the resulting returns look attractive to those considering the ETF for the first time.

Global X hasn't yet indicated when it expects to release its marijuana ETF, and it has a long history of opening other funds. That expertise could well come in handy as the ETF provider tries to figure out when the best time will be to tap into demand from cannabis investors -- especially in light of other competing ETF managers who are also contemplating marijuana ETFs of their own.

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Stocks Mentioned

ETF Managers Trust - ETFMG Alternative Harvest ETF Stock Quote
ETF Managers Trust - ETFMG Alternative Harvest ETF
MJ
$7.60 (-2.31%) $0.18
AdvisorShares Trust - AdvisorShares Pure Cannabis ETF Stock Quote
AdvisorShares Trust - AdvisorShares Pure Cannabis ETF
YOLO
$7.07 (1.29%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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