Growing flowers of cannabisRon Ward/The Globe and Mail
The world's only exchange-traded fund that tracks stocks involved in the growth and sale of cannabis is undergoing a reshuffling amid a late-year surge in investor interest.
This week, the Toronto-listed Horizons Marijuana Life Sciences Index ETF (HMMJ) said the shares of 11 companies were added to its portfolio, giving investors access to a broader basket of stocks in the fast-growing legal market. Those firms range in size from CannTrust Holdings Inc., with a market cap of $760-million, to Innovative Industrial Properties Inc., which is listed in New York and has a market cap of $86-million (U.S.).
Money has been flooding into publicly traded marijuana firms that today serve only medical patients. The market caps of these businesses have ballooned and their shares are changing hands at a frantic pace ahead of next July when Canada is set to legalize the recreational use of cannabis. Companies are raising money to construct bigger production facilities, striking deals to boost their product mix and entering new countries.
"We have seen fantastic results come out of this sector," said Steve Hawkins, president and co-chief executive officer at Horizons ETFs Management (Canada) Inc.
"That has opened the door for a lot of new names to come into the index and, thus, the portfolio."
Launched in April, HMMJ started off with a bang, attracting more than $100-million (Canadian) in assets under management (AUM) within the first month, but its assets and trading volumes flatlined over the summer. Since November, the fund has started to pick up steam amid a steep rally in pot stocks. Its largest holding, Canopy Growth Corp., has more than doubled its stock price since late October.
Assets in the ETF have grown to more than $381-million from $10-million. But it doesn't come cheap for an index fund, charging 0.75 per cent in management fees.
HMMJ aims to replicate the 39-stock North American Marijuana index. Of these, HMMJ tracks 30 of them – a number that has more than doubled since the fund's inception. Mr. Hawkins expects to add two to five new companies to the ETF every quarter for the next year, as new companies emerge in the cannabis sector. So far, HMMJ is the only ETF in the world to be approved by regulators. In the United States, ETF companies continue to wait for the green light to launch a fund with cannabis exposure. There are roughly five U.S. such firms in the race, of which two filed applications this month.
The first out of the gate in the United States could see more than $1-billion (U.S.) in AUM within the first year, predicts Eric Balchunas, senior ETF analyst for Bloomberg in the United States.
"Most thematic ETFs need to do something in order to draw attention to the product, but HMMJ was quick out of the gate and in no time had $150-million [Canadian] in assets," Mr. Balchunas said.
Even when returns were less than attractive, "investors didn't leave. HMMJ has seen this steady and sticky volume in assets that doesn't depend on returns," he added.
The first American fund could be U.S.-listed Tierra XP Latin America Real Estate ETF (LARE), which is expected to do a major transformation on Dec. 26, including a change in name and mandate. The real estate fund has plans to become the Alternative Agroscience ETF and track an index that could include companies connected to cannabinoid use.
A U.S. ETF could give investors access to another basket of marijuana stocks not found in HMMJ.
That's because HMMJ doesn't include shares of cannabis firms that do most of their business in the U.S. market, where the drug is legal in certain states but illegal under federal law.
Mr. Hawkins says Horizon has taken this approach because HMMJ is listed on the Toronto Stock Exchange (TSX). In October, the TSX formally banned marijuana firms that breach U.S. federal drug laws from listing on its market. It is now reviewing its existing issuers and says it will delist any found to be offside its rules.
Aphria Inc., a grower that is based in Leamington, Ont., that also has some cannabis investments in Arizona and Florida, is one of the stocks whose TSX listing is up in the air. Shares of Aphria make up 10 per cent of HMMJ. Horizons is waiting for the TSX to complete its review before it considers removing its stock from HMMJ, Mr. Hawkins says.
Cannabis investors are no strangers to this kind of uncertainty.
"Of course there are companies that stabilize the marijuana index, but it is still a very volatile investment theme and I am pretty sure it will remain volatile in the upcoming years," said Steffan Scheuble, CEO of Solactive AG, the index provider for HMMJ and creator of the North American Marijuana index.
The marijuana index is made up of more than just companies that cultivate and sell cannabis. The shares of businesses that conduct research on the drug, sell products that help the plants grow or lease property to producers can be eligible for inclusion.
To qualify, a stock has to be listed on an exchange in Canada or the United States, generally has a market cap of more than $75-million and has at least 75,000 shares traded on a daily basis.