The cannabis industry has had an extremely tough couple of years. After seeing an upsurge in interest in 2018 as Canada went through the process of legalizing recreational marijuana, the reality of more open cannabis markets fell short of the hype. That sent shares of top stocks in the marijuana space sharply lower, and along with it, top marijuana ETF ETFMG Alternative Harvest (NYSEMKT:MJ) has lost more than 60% of its value over the past two years.

Recently, though, some marijuana stocks have started to perk up again. That's pushed shares of the Alternative Harvest ETF up 13% over the past month, but some investors fear that the cannabis-focused fund will never be able to claw back all of its losses. To understand why, you have to look at the stocks that have played the most important role in Alternative Harvest's returns and see whether they match up with the growing leaders of the cannabis industry.

Marijuana leaf prominently centered on a pile of similar leaves.

Image source: Getty Images.

When your biggest stocks get hit the hardest

The Alternative Harvest ETF tracks an index of companies within the cannabis industry. It includes growers along with companies that are involved in supplying ancillary products and services to grow operations. It also includes companies in the pharmaceutical and tobacco arenas looking to diversify their exposure by incorporating cannabis into their business models.

Unfortunately for Alternative Harvest, the big stocks in the index haven't been great performers in 2020. Consider the following:

  • Canopy Growth (NASDAQ:CGC) is down about 7% from where it started 2020. It currently makes up 10% of the fund's assets.
  • Cronos Group (NASDAQ:CRON) gets an 8% weighting and has fallen 24% year to date.
  • Tilray (NASDAQ:TLRY) has been a particularly poor performer, dropping 63% since Jan. 1. Yet it still makes up nearly 8% of the fund.

The picture gets even grimmer when you look at some smaller players. Aurora Cannabis (NASDAQ:ACB) has plunged more than 80% in 2020, but it still gets a 4% weighting in the fund. OrganiGram Holdings (NASDAQ:OGI) and HEXO (NASDAQ:HEXO) haven't fared much better, falling 48% and 60% respectively but still making up a combined 9% of the fund.

Are investors losing interest?

Alternative Harvest has seen its asset levels languish as marijuana stocks have stayed under pressure. Asset levels are currently just over $600 million, less than half what they were at their peak levels.

Yet much of that drop reflects the loss in value of the stocks the ETF holds. In fact, if investors were leaving the fund in droves, then you would expect to see even lower asset levels. That suggests that shareholders are hoping that Alternative Harvest can bounce back.

What's missing at Alternative Harvest

To be fair, the Alternative Harvest ETF hasn't whiffed on all of its stocks. Its ownership of GrowGeneration (NASDAQ:GRWG) has been a big winner in 2020, with the investment having risen by more than 350% year to date. Yet even after that huge rise in the hydroponic supplier's shares, the ETF's allocation to GrowGeneration is only a bit over 3%.

But some strong performers aren't in the portfolio at all. Consider Trulieve Cannabis (OTC:TCNNF), which has more than doubled so far in 2020. The Florida-focused medical cannabis grower and dispensary network has done a great job of penetrating one of the most important state markets in the U.S., but it hasn't gotten onto Alternative Harvest's radar as of yet.

Alternative Harvest should take a long, hard look at its index provider and figure out whether it's coming up with the best companies in the sector. If it's not, then the ETF would be well-served to consider changing its index to find the marijuana stocks most likely to participate in a rebound in the cannabis industry when it comes.

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.