The cannabis patch: An alternative investment whose time has come?
WASHINGTON – Given our chaotic Election 2020, the bizarre Inauguration Day Festivities for now-President Joe Biden and 25,000-30,000 of his closest military friends, and the follow-on anti-Democrat-anti-Biden Antifa / BLM window-breaking festivities in Seattle and Portland (where else?), traders, investors and just plain old election- and COVID lockdown-exhausted American citizens probably need a break. In 2021, investing in the growing international cannabis patch might offer one answer to America’s continuing high anxiety level. Where it’s legal, of course. But an alternative might be investing in the cannabis patch rather than toking up.
Investing in marijuana: Has the time for investing in the cannabis patch finally come?
Am I smoking something? No. But failed investment ideas sometimes fail because their time has not yet come. I’ve discussed the pros and considerable cons of investing in marijuana stocks before, back in 2018. (Links here, here, here, and here.)
But given this sector’s volatility and sheer iffiness, I also suggested those thinking about weed as an investment to consider the then-prominent marijuana “industry”-based ETFMG Alternative Harvest ETF (NYSE trading symbol: MJ). That’s because many marijuana-centric companies are tiny, unprofitable for a variety of reasons. By entering the cannabis patch arena via an ETF, investors who want to gamble on this unproven industry (from a profit-and-loss (P&L) standpoint can invest instead in a broad portfolio of these stocks.
This doesn’t mean you’ll make money for sure. No investment can do that. But diversifying your risk in a risky area gives you at least a fighting chance not to entirely lose your shirt. (Or another word.)
MJ: Broad-based cannabis patch ETF with an iffy performance
MJ not only carries shares in penny-stock-style Canadian marijuana growers and marketers. It also leavens out its portfolio with marijuana pharmaceutical companies (packagers and sellers of medical marijuana products). It also includes some interesting related stocks that are far more stable. These include traditional tobacco stocks like Phillip Morris International (NYSE: PM), Altria (NYSE: MO), and, surprisingly, Scotts Miracle Gro (SMG).
The former two are longtime, high-yielding tobacco stocks. But, seeing the legal writing on the wall, they’ve been diversifying. And one area of diversification they’ve been exploring is in rolling a different kind of cigarette that doesn’t contain tobacco. (Wink wink, nudge nudge.)
The latter company, of course, is famous for its eponymous fertilizer products. But unbeknownst to the general public, SMG has, for years, been marketing an extensive line of greenhouse style setups (racks, lighting, etc.) for those companies making a living by growing vast quantities of marketable weed in greenhouses, once-abandoned factories, or wherever.
By including companies like these in its substantial portfolio, MJ diversifies investing risk and actually adds some dividend power to a basket of companies that are generally so unprofitable that they may never generate a dividend.
MJ: The numbers tell the tale
But, over time, there’s a big problem with MJ, an ETF I’ve personally, well, experimented with (investment-wise) at least 3 times. And that problem is this: I’ve never made a profit on MJ. Neither have many other investors. It’s been a real dog. It tends to be a matter of timing, and the timing always seems to be bad. At least for me. Of course, MJ’s trajectory could always change.
But that’s pretty much true for the whole industry, at least up to now. A December article at Investopedia puts some numbers on this.
“Marijuana ETFs have dramatically underperformed the broader U.S. equity market. The benchmark ETFMG Alternative Harvest ETF (MJ), the largest ETF in the sector by assets under management, has provided a total return of -2.0% over the past 12 months compared with a total return of 19.4% for the Russell 1000 as of November 30, 2020.”
Why is this? While Canada pretty much completely legalized marijuana for whatever people wanted to use it for, the US, a much bigger market, is an iffier proposition. That’s mainly because of one big problem. While many states have been happily legalizing weed for medical and / or recreational use, Federal law still prohibits most uses. Period.
So technically, even in states that have “legalized” marijuana, it’s still illegal according to the Feds. For now, we’ll have to leave it up to our entirely dysfunctional Congress. Meaning everyone involved in this business needs to keep an eye out. You never know.
Some surprising new ETFs in the cannabis patch may offer better returns. Emphasis on MAY…
But since my original series of articles on marijuana investing, I’ve recently made a “new” discovery, primarily via that Investopedia article I just quoted. There are, in fact, some new kids on the block in the marijuana ETF universe. Eight to be precise, at least for now.
Like MJ, these companies
“…provide investors with exposure to equities of companies that engage in the cultivation, distribution, and sale of marijuana and related products. Products of marijuana companies include dried flowers, oils, seeds, edibles, and more. Still prohibited as an illegal substance in many parts of the world, marijuana is gaining wider acceptance for both medicinal and recreational purposes. Support for continued legalization is growing, and cannabis is now a multi-billion-dollar industry.”
That still guarantees nothing. But a trio of those new kids (ETFs) on the block has actually gone up – not down – over the past 12 months. Namely:
- AdvisorShares pure cannabis ETF (NYSE Arca: YOLO). Up 44.5%
- Amplify Seymour Cannabis ETF (NYSE Arca: CNBS). Up 28.9%
- Cannabis ETF (NYSE Arca: THCX). Up 9.6%
By comparison, MJ was down by 2% over the same period of time. That’s likely due in part to the fact that our Three Cannabis Musketeers invest more widely in non-US, non-Canadian companies, giving them substantial international exposure. And risk.
Do note this, however…
All three of these ETFs involve more low-priced cannabis pure-play investments than MJ. This could be one reason why they outperformed both MJ and general markets in FY 2020. MJ’s more traditional hedge investments got hit, like most big stocks, by the March 2020 coronavirus crash, though they’ve since partially recovered. That said, as investment advisors almost universally preach, “Past performance is no guarantee of future results.”
More fun facts about investing in the cannabis patch
Investopedia lists three additional fun facts about cannabis ETFs in general. For me, however, two of them are the most important.
“The top holdings of these ETFs are Village Farms International Inc., GrowGeneration Corp., and Village Farms International, respectively.
“On November 3, 2020, voters in New Jersey, Arizona, and Montana approved ballot measures to legalize recreational marijuana, and Mississippi has voted to legalize medical marijuana use. South Dakota approved ballot measures to legalize both.”
The December 2020 Investopedia article points to one more important fact that offers a useful measure for those investing in any ETFs.
“ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs which can negate some of your investment gains or increase your losses.”
This may not exactly hold true for those (like yours truly) who hold their accounts at one of any number of discount brokerages that started charging zero commissions in 2019-2020. But it’s still a cautionary note.
Watch out for low volume-influenced bid-ask spreads
I’m less worried about another issue Investopedia raises: management costs. These are rather high in these ETFs, largely due the speculative nature of the industry they cover. But the AUM issue is more important. Widely traded ETFs – generally, ETFs with a significant AUM figure – have narrower bid-ask spreads than the more thinly traded (low AUM-influenced) ETFs. The latter often have very wide bid-ask spreads. Translated, this means trading interest is relatively low. So you’ll be taking a significant chance of getting a not-so-hot price when you’re trying to buy or sell shares. Never use “market orders” (buy at the next price) when trying to purchase such shares.
More on AUM
Of the Three Musketeers, only one of them – YOLO – has what I’d regard as a decent AUM number, $107 million according to Investopedia. For comparison, my brokerage currently lists MJ as having $973.7 million Assets Under Management. I.e., it’s probably a safer investment. Save for its poor returns. There’s always a trade-off. For more complete information on the Three Musketeers, read the entire, detailed Investopedia article here.
Final Note: Any article containing performance figures for the past year – like most articles – often forgets one cautionary note that’s been an investment advisor mantra since forever. “Past performance is no guarantee of future results.” So travel with caution if you’re interested in the marijuana patch.
– Headline image: A gram of marijuana “bud,” roughly the size of a human thumb.
Image by Evan-Amos via Wikipedia entry on marijuana. Edited caption. Image is in the public domain.