Cannabis Sector ETFs Continue to Struggle

This is a copy of the August 18th edition of our weekly Newsletter, which we have been publishing since October 2015.


We have been very cautious on Cannabis exchange-traded funds, and the recent shockingly inept rebalancing on August 9th by ETF Managers Group Alternative Harvest ETF (MJ) raises our concerns even further. We wonder who in their right mind sells more than the average daily volume as the market is closing, especially on a Friday in the summer.

With the exception of just the large MJ and the Horizons HMMJ, no other ETFs have come even close to reaching critical mass. With the proliferation of new ETFs, it’s likely going to make it increasingly difficult to do so. Take for example The Cannabis ETF, (THCX). The fund advised by and promoted by the CNBC regulars, brothers Jon and Pete Najarian. While its growth in assets has been better than some peers, they manage just $17 million after launching almost six weeks ago.

Most of these ETFs aren’t really diversified, with heavy exposure typically to large Canadian LPs. For the most part, they have very little or no exposure to MSOs. So far, ETF managers have shown a weak understanding of the sector and their holdings, as they are typically fund managers rolling the dice on a new hot theme. Managers of passive index ETFs typically don’t need to know much except how to replicate the index, but we think it is generally not wise to invest this way in such a dynamic industry where there are so many inefficiencies in pricing.

As a reminder, while the performance may be similar, the odd inclusion of companies that we think makes little or no sense has benefitted MJ due to the cannabis sector’s weakness. When cannabis regains investor attention and the market turns, HMMJ should lead the way. Here are the returns over the past year for the two ETFs:

Also, as the ETFMG fiasco illustrates, some of these managers clearly don’t understand liquidity and market impact. Fortunately for investors and unfortunately for the funds, this generally isn’t a problem except for the very large funds, of which there are two. We have tracked HMMJ since their debut. Not only has their portfolio diversified, though it remains top-heavy with LPs, but we haven’t seen them display incompetency as MJ has just done.

On paper, ETFs can sound like a good deal, and they are in some cases, like for an investor with limited financial resources. We aren’t comfortable being enthusiastic about almost any of the ETFs. It’s not a great option for most investors except those with small amounts to invest or those who don’t want to spend a lot time researching individual companies.

Supreme has shown its strong execution as evidenced by the Q4 revenue pre-announcement of $19 million, which was substantially above analyst expectations. It also provided guidance for fiscal 2020 of $150-180 million, well ahead of analyst communities outlook. Additionally, the company has closed several transactions recently that expand its capabilities both in Canada and globally.

To learn more about The Supreme Cannabis Company, a client of New Cannabis Ventures, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button in order to stay up to date with their progress.

To learn more about The Supreme Cannabis Company, a client of New Cannabis Ventures, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button in order to stay up to date with their progress.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

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Alan & Joel

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

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