Cannabis ETF Required to Reduce Exposure to Large Canadian LPs

The Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ) (OTC: HMLSF) has ballooned in size as the Canadian licensed producers (LPs) have soared, with the ETF net assets now at C$327.7MM as of 12/7. Its quarterly rebalancing is likely to occur within the next week, and this will lead to the sale of a portion of its three largest holdings, Aphria (TSX: APH) (OTC: APHQF), Aurora Cannabis (TSX: ACB) (OTC: ACBFF) and Canopy Growth (TSX: WEED) (OTC: TWMJF), all of which exceed the 10% maximum position size at the time of rebalancing.

Given the size of the ETF, this means that it will be selling $14.6mm of Aurora Cannabis, $10mm of Aphria and $6mm of Canopy Growth in the coming days, with the proceeds distributed into smaller members of its portfolio.

Solactive manages the benchmark index, the North American Marijuana Index. It posts guidelines that describe the index composition:

Based on the criteria outlined in Chapter 4, the Index Calculator determines the securities that are eligible for inclusion in the index. These securities are filtered according to the criteria below, resulting in the final index selection:

1. Minimum Market Capitalization of at least CAD 75 million. Existing index member need to have a Minimum Market Capitalization of at least CAD 67.5 million.
2. Minimum Average Monthly Daily Value Traded of at least CAD 250,000. Existing index member need to have a Minimum Average Monthly Daily Value Traded of at least CAD 200,000.

The index, which caps exposure to any single name at the time of rebalancing to 10% “with the excess weight being redistributed proportionally among all index components with a weight of less than 10%”, is set to be rebalanced on December 15th.

The ETF has made some changes since we last updated it, disposing of Arena Pharmaceuticals (NASDAQ: ARNA) and adding CannTrust (CSE: TRST) (OTC: CNNTF), Delta 9 Cannabis (CSE: NINE) (OTC: VNRDF), Newstrike Resources (TSXV: HIP) (OTC: NWKRF) and Radient Technologies (TSXV: RDI) (OTC: RDDTF). The  additions to Delta 9 and Newstrike were made on 12/7.

The ETF purposefully excludes companies that operate in the United States that are in violation of federal laws, which explains why the index members Liberty Health Sciences (CSE: LHS) (OTC: LHSIF) and Marapharm Ventures (TSXV: MDM) (OTC: MRPHF) are excluded. It also holds seven positions, outside of the index, including CannTrust, Delta 9, Emerald Health (TSXV: EMH) (OTC: EMHTF), ICC International Cannabis (TSXV: ICC) (OTC: ICCLF), Hydropothecary (TSXV: THCX) (OTC: HYYDF), Newstrike and WeedMD (TSXV: WMD) (OTC: WDDMF). Here is the complete list of holdings as of 12/6:

HMMJ has increased 44% since we wrote about the last rebalancing in September, but it has dramatically underperformed the six largest Canadian LPs:

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

Get Our Sunday Newsletter