Marijuana ETFs: Gaining Exposure to A Controversial Yet Coveted Asset Class

A decade ago, cannabis could never be seen as a profitable venture. And yet, in less than a decade, almost half of U.S. states have legalized marijuana.

Thus, for many investors, the concept of a controlled, legal marijuana sector represents several new investment and expansion prospects – The global legal cannabis market is expected to expand at a compound annual growth rate of 26.3% and reach $91.5 billion by 2028. Given this anticipated development, it is not surprising that many investors are interested in cannabis stocks.

This article examines the topic of investing in marijuana and the options available to investors.

Investing in the marijuana sector

Investing in the marijuana sector is comparable to investing in other industries. These equities trade on U.S. stock exchanges such as the Nasdaq, and they are available for purchase and sale via any major broker.

ETFs provide a simpler, more simplified method of investing in marijuana equities. There are numerous ETFs centered on marijuana, and we will examine a few of them in this article.

Marijuana ETFs

In recent years, exchange-traded funds, more often known as ETFs, have had enormous growth spurts in terms of both their assets and their overall popularity. Therefore, it was likely only a question of time until the ETF industry and the rapidly expanding market for legally harvested marijuana collided with one another.

Marijuana-related exchange-traded funds operate similarly to standard ETFs. As such, a marijuana ETF is a fund that monitors a selection of various names associated with the marijuana business, like how a technology ETF tracks technology-based companies.

The only difference being, marijuana-related exchange-traded funds (ETFs) have traditionally had difficulties in getting off the ground. Regulation is a key worry, since many financial institutions are reluctant to sponsor ETFs tracking businesses in an illegal activity. A portion of the worry relates to the structure of ETFs, in which assets must be kept in a United States-based bank that also owns the underlying securities. However, many are unwilling to assume this risk due to regulatory uncertainty.

Selecting Cannabis-Related ETFs

Investors interested in cannabis-related exchange-traded funds have few alternatives.

AdvisorShares Pure US Cannabis ETF (MSOS)

MSOS actively manages U.S. cannabis enterprises, including multi-state operators (MSOs) in several sectors. ETFs aim long-term capital appreciation. It holds REITs, healthcare, hydroponics, and pharmaceuticals centered assets. It is important to note that MSOS employs swap contracts to gain cannabis exposure, which may enhance volatility.

ETFMG Alternative Harvest ETF (MJ).

MJ is passively managed relative to other funds and tracks the Prime Alternative Harvest Index. This index includes publicly traded cannabis companies that potentially benefit from medical and recreational marijuana legalization efforts. Current top holdings include Tilray (8%), Cronos Group Inc. (8%), and Canopy Growth Corporation (6%).

Are Marijuana ETFs to Be Considered in a Portfolio?

Not everyone is qualified to invest in marijuana firms. Such stocks should only be added to the portfolios of sophisticated, risk-tolerant investors.

Despite great performance in certain instances, the future of marijuana ETFs is difficult and unknown. With banks keeping on hesitating to assume the possible legal drawbacks associated with sponsoring an ETF in such a sector, it is probable that a significant number of marijuana ETFs will fail to launch.

Furthermore, even for aggressive investors, it is unwise to invest too much of one's portfolio in a single marijuana stock or ETF. Consider initiating a modest investment in a marijuana stock and increasing your holdings as the cannabis market expands and the company's sales and earnings improve. As your investment thesis is proven, the investment becomes less hazardous; but, if the company underperforms, you should reconsider your investing assumptions.

Hence, while there is still a considerable risk associated with marijuana ETFs, you will still gain exposure to dozens of companies. Ideally, if one company in the fund fails, the losses will be compensated by the success of another company.

Marijuana Investment Risks

Regulatory risks – With marijuana regulations still subject to many regulations, as well as stringent limits imposed on banks that conduct business with marijuana-related enterprises, it is challenging for U.S. cannabis businesses to gain access to essential financial services.

Supply risk – As a rapidly expanding industry within the agriculture sector, marijuana is particularly susceptible to supply and demand imbalances.

Lack of transparency: As numerous cannabis companies are publicly traded on OTC exchanges, they are not compelled to file financial statements on a regular basis. This can create a significant barrier for investors seeking to evaluate the risk of a company.

Investing in Marijuana ETFs – The Bottom Line

Market participants may wonder whether cannabis ETFs are worthwhile investments. While many are optimistic about the industry's potential success, many investors find it too difficult to track marijuana ETFs in a continuously moving market. However, if the market projections made by some industry specialists and enthusiasts prove right, early investors may be the most satisfied with their choices.

Nevertheless, it is important to remember that before investing, conducting thorough research is vital. While it is normally encouraged that investors adopt a long-term perspective when purchasing equities, the dynamics of this sector are shifting swiftly. A few months from now, the factors you should employ to make a stock-buying choice might be drastically altered.

Investors in the marijuana sector should actively watch any marijuana stocks or ETFs in their portfolios, as well as the industry as a whole. Some changes, such as if the federal government of the United States loosened its marijuana regulations, might be helpful, while others may be catastrophic.