Cannabis, and anything cannabis related, has been the hottest talk of stock market investors of late. Many investors believe the cannabis market has the highest potential for high capital gains in the near future. These beliefs are not unwarranted, as cannabis exchange traded funds have provided returns of more than 30% thus far in to 2019. However, the initial excitement of investing in cannabis is sure to dwindle.
Daniel Straus, Vice President of ETFs and financial products research at National Bank of Canada, said that pot ETFs face a “day of reckoning.” He believes that investor interest in the industry will fade quickly. “The risk may be to the starry-eyed fund provider who thinks putting a marijuana ETF out there is an easy path to asset gathering,” he went on to say. “When people find marijuana investing boring, many of these smaller products will close shop.”
An ETF is a great option for an investor without a plethora of knowledge in the industry because they allow for diversity and safety within a portfolio. A cannabis ETF will often allow investors to invest their money in many different sectors of the cannabis industry – such as oils, CBD, medical, recreational, and more.
Fear of dilution of the industry weighs over investors as currently, at least nine ETFs in the United States and Canada invest in cannabis stocks, and two more are seeking approval to list in the United States.
Despite any fears of legalization or safety issues, investors have flocked to invest in the ETFs as funds have seen hundreds of millions of dollars flow in. The world’s first cannabis ETF, The Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF), raked in over USD 76 Million within days of trading in Toronto in 2017. ETFMG Alternative Harvest ETF (NYSE: MJ) added more than USD 200 Million merely a week after it shifted from Latin American Real Estate to cannabis.
Although cannabis is now legal in 11 states across the United States and is legal in many more for medical uses, political and regulatory risks are still in play. Marijuana remains an illicit substance in the eyes of the federal government.
“First-mover advantage probably is enough to open the floodgates but then performance will, as time goes on, determine where the tide really flows,” said Straus. “I do think that a day of reckoning will come.”