Around the world, the legalisation of marijuana is regularly discussed in political circles. However, marijuana as a pharmaceutical product - cannabis and cannabidiol (CBD) - is gaining acceptance, mainly for the treatment of chronic pain, but research shows the beneficial application in the treatment of cancer and multiple sclerosis.
The global legal marijuana market was valued at $9.1 billion in 2020 and is expected to grow at a compound annual rate of 26.7% from 2021 to 2028. The marijuana sector, as measured by Global Cannabis Stock Index, has significantly underperformed the broader stock market over the past 12 months, with a one-year total return of 17.0% versus the S&P 500's one-year total return of 36% in 2021. Cannabis stocks had suffered the same fate as many speculative transformational technology stocks. While this drag on growth has subsided, for now, we may continue to see a strong bid for cannabis names in the weeks ahead, particularly those with strong business models.
Are cannabis stocks worth buying at this time?
Cannabis stocks have rebounded strongly in 2022 from the sharp decline in 2021, while stocks in general and other more speculative assets are stabilising after a difficult start to the year. For example, the S&P/TSX Cannabis Index is up 16.73% in February 2022 year-to-date. This improvement in the cannabis equity market, which has been supported by higher trading volumes, has far outpaced the general stock market or other high-risk sectors, and the rally has made cannabis stocks the best performers so far this year:
In the short term, the market's performance may be closely tied to that of stocks in general, but the fourth-quarter 2021 financial reports for the index heavyweights and ancillary companies, as well as the outlook for those companies, will likely play a substantial role in determining the sustainability of this rally.
Cannabis stocks still offer the potential for higher returns at lower valuations, making them an attractive buy at the moment. However, the extreme volatility of the market should not be underestimated. A further disappointment on the legalisation front could trigger a further decline in the market. Thus, risk-averse investors and those entering the market for the first time should consider investing in active or passive ETF funds.
ETFs vs. stocks, to reduce volatility risk
Most companies active in this industry are small caps with little information and research performed on them. This is accompanied by low market liquidity, especially on the U.S. market on which most cannabis stocks remain OTC-traded. Additionally, as for most new business segments, the risk of a price bubble is all but non-existent. Given the industry’s young age, there’s ample room for shakeout that could significantly continue to affect stock’s price volatility. Cannabis exchange-traded funds ( ETFs) still come with considerable risk but are a straightforward way for investors to gain exposure to a diversified basket of marijuana equities and profit from this growing industry.
On the one hand, investing in ETFs can actually cause you to miss out on the high returns of an individual stock, but on the other hand, cannabis ETFs can help you avoid major losses, such as in 2021. Indeed, the majority of marijuana ETFs fell by half as much as stocks, which lost up to 80% of their value.
Why should investors invest in Cannabis ETFs?
Cannabis ETFs 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. Investing in cannabis ETFs allow a broad diversification to companies with business activities in both the medical cannabis and CBD industry. ETFs portfolios may include companies that:
• Grow, distribute or sell marijuana.
• Research the medical uses of marijuana, such as those in the pharmaceutical and biotech industries.
• Have significant exposure to marijuana stocks, such as those in the alcohol and tobacco industries.
Cannabis ETFs characteristics
0.65% p.a. - 0.80% p.a. annual total expense ratio (TER) of cannabis ETFs
2 Indices S&P DowJones International Cannabis Index (SPTSXCAN, 2019) Global Cannabis Stock Index (2013)
10 ETFs on cannabis, excluding leveraged ETFs and ETNs
Investment universe of cannabis ETFs
Cannabis ETFs have bounced in recent weeks, with most major funds posting double-digit comebacks and reducing subsequently the loss that occurred in 2021. Since January 31: here are the best performers:
- AdvisorShares Pure US Cannabis ETF (MSOS) is up over 22%. to a YTD return of -3.99%
- The Alternative Harvest ETFMG (MJ) is up nearly 14%. to a YTD return of 0.0%
- AdvisorShares Pure Cannabis ETF (YOLO) is up about 16.5%. to a YRT return of- 11.80%
- The Global X Cannabis ETF (POTX) is up over 21%. to a YTD return of- 0.2%
- Amplify Seymour Cannabis ETF (CNBS) is up over 20%. to a YTD return of -4.7%
- The Cannabis ETF (THCX) is up 14% to a YTD return of -7.7%
Here are some investment options for 2022:
Data as of February 14th, 2022
Disclaimer: This article is provided for information purposes only and does not constitute an invitation to invest. Please seek advice from your investment advisor before investing.