Marijuana stocks had a tough 2019, suffering big losses as cannabis companies largely disappointed investors with their performance in the aftermath of Canada's legalization of recreational marijuana in late 2018. Competitive pressures and challenges in rolling out a retail presence in the Canadian market sent many big-name marijuana stocks sharply lower, especially in the second half of the year.
Given the tough environment, it's no surprise that marijuana ETFs struggled as well. Yet even though the performance of the top exchange-traded funds covering cannabis stocks was poor, there's one sign that most investors still haven't given up on the cannabis industry as a potential gold mine for future wealth -- or on the prospects for ETFMG Alternative Harvest (NYSEMKT:MJ) to bounce back from its tough times.
Just how hard did marijuana ETFs get hit last year?
Many investors look to ETFs to help them diversify against risk, and they can be quite effective in defending against bad news that hits one particular company harder than the rest. But even ETFs can't protect against a downtrend that affects an entire sector, and that's mostly what the cannabis industry faced in 2019.
|
Marijuana ETF |
2019 Return |
|---|---|
|
ETFMG Alternative Harvest |
(31%) |
|
AdvisorShares Pure Cannabis (NYSEMKT:YOLO) |
(52%)* |
Data source: Yahoo! Finance. * Since IPO in April 2019.
After early gains, ETFMG Alternative Harvest lost ground steadily throughout much of the year. AdvisorShares Pure Cannabis did even worse, as its bad timing in offering shares to investors midyear proved to be even more devastating to its returns.
Why marijuana ETFs aren't dead yet
The timing of the downturn in the marijuana sector was especially unfortunate for the Pure Cannabis ETF, because it was seeking to build up assets early on. Poor investor sentiment has held the ETF back, and after nearly a year of operations, the fund has only managed to attract about $45 million in assets under management. Even with a relatively high expense ratio of 0.74%, that represents less than $400,000 in fee income for Pure Cannabis -- which is likely not enough to make the ETF sustainable over the long run.
Image source: Getty Images.
Alternative Harvest has seen similar pressure on its popularity, as its assets have fallen from more than $1.2 billion at the peak last spring to just over $825 million currently. That would seem to imply an investor exodus from the sector.
However, a closer look shows a different cause. In a down market, assets under management can fall for two reasons: the value of the ETF's portfolio is falling, and investors are pulling money out of the fund. If investors are selling out, then the value of the ETF's assets should fall faster than the share price.
The rate of decline in assets under management since July has been less than the drop in the ETF's share price. That actually suggests that new money continues to flow into the marijuana ETF, helping to offset the downward pressure from investment losses.
A bounce in 2020?
At least so far in 2020, investor optimism seems to have been justified. Alternative Harvest is up almost 10% so far this month, and that's helped to attract a brand-new set of fund inflows. Value-seeking investors hope that the headwinds that cannabis companies faced in 2019 will finally let up, allowing fundamental growth prospects to shine through.
That news might come too late for the Pure Cannabis ETF. Even a doubling of assets under management would leave the fund shy of the $100 million mark, and it'll be tough for AdvisorShares to operate the ETF economically at that asset level.
For Alternative Harvest, though, the rebound in cannabis stocks comes as good news. If it can put together a strong 2020 to offset losses in 2019, then Alternative Harvest could well be the last ETF standing in the marijuana market.
