November 3, 2020

Now Could Be the Best Time To Buy Marijuana ETFs

Now Could Be the Best Time To Buy Marijuana ETFs
Now Could Be the Best Time To Buy Marijuana ETFs

After a few years of marijuana stocks being high-flyers, largely due to investors rushing in for fear of missing out on the next big industry, the marijuana industry has not been kind to those early investors in recent years. However, that all may be changing very soon.

With a few more States recently voting to legalize the drug and the U.S. House of Representatives scheduled to vote on the decriminalization of marijuana, it truly now appears that it is just a matter of time until the drug is legally sold throughout the United States.

Furthermore, the Mexican government appears to also be on the verge of legalizing the drug as well. If Mexico does legalize marijuana, it could become the largest cannabis market in the world. And since Mexico’s climate is ideal for growing marijuana, it could become a powerhouse in terms of a worldwide supplier, or at a minimum, the top North American supplier. However, none of the major Canadian marijuana companies have a foothold in Mexico yet, which could cause delays in how long investors need to wait to see any meaningful gains from their investments in the industry today.

Regardless, though with more U.S. States legalizing it and decriminalization votes set to take place in the U.S. legislature, and Mexico appearing to be on the verge of legalizing the drug, now would seem like a good time to get on the train. It’s usually better to be early than it is to be late.

So, if you are ready to buy into the industry, or even if you want to wait, let me give you a few options you can look at to play the second wave in the marijuana investing landscape.

First, we have the first and largest marijuana Exchange Traded Fund, the ETFMG Alternative Harvest ETF (MJ). MJ tracks a market-cap weighted index of global firms engaged in the legal cultivation, production, marketing, and distribution of cannabis, cannabinoids, or tobacco products. MJ was the first marijuana-focused ETF in the U.S. It currently holds about 30 stocks with $563 million in assets under management. The fund has a slightly high expense ratio of 0.75%, but it currently has an 8.12% yield. Over the past 3 years, the fund is down more than 26%, but it is up almost 5% over the last month.

Another quality marijuana ETF to consider is the AdvisorShares Pure Cannabis ETF (YOLO). This is an actively managed ETF that attempts to produce long-term capital appreciation by investing in domestic and foreign cannabis companies. They define as firms that derive at least 50% of net revenue from the marijuana and hemp industries. YOLO is currently the second-largest marijuana ETF, with $61 million in assets under management and 34 holdings with a weighted average market cap of $1.6 billion. The funds’ expense ratio is 0.74%, and it has a yield of 3.87%. Year-to-date, the fund is down just 3.88% after a 5.9% gain over the last month.

Another slightly different option is the MicroSector Cannabis Index ETN (MJJ). MJJ tracks a market-cap weighted index of North American companies (currently just those in the U.S. and Canada, but could expand to Mexico if the government legalizes the substance) that provide products or services related to the medical or industrial use of cannabis or its derivatives. The fund will invest in both pure-play opportunities in the cannabis industry or quasi plays, those firms that derive less than 50% of revenue from marijuana. Furthermore, MJJ imposes a 9.9% cap on all holdings, which means no single stock will ever get larger than 9.9% of the fund’s assets. This protects investors from single stock exposure, which at the end of the day is why you are investing in a fund as opposed to a single stock anyway. MJJ is also just one of two Exchange Traded Notes, which is different than an Exchange Traded Fund, in the marijuana industry. Year-to-date, the fund is up almost 8%, after a 5.75% rise over the last month.

Now, not all investors want to dive into the marijuana industry, and that is understandable. However, if you are one of those investors who want to, buying into the industry today could allow you to catch the industry’s full move if it does accelerate in the coming months. Furthermore, it’s important to remember when you are building a position. You shouldn’t buy the whole position in one lump sum. Buy in thirds over the course of months; that way, you protect yourself from a sudden drop by cost averaging into a full-size position.

Matt Thalman
INO.com Contributor – ETFs
Follow me on Twitter @mthalman5513

Disclosure: As of this writing, Matt Thalman owned shares of ETFMG Alternative Harvest ETF and AdvisorShares Pure Cannabis ETF. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.