Overexposed Cannabis ETF Hit Hard by Biotech Losses

Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ) (OTC: HMLSF) has been hit hard over the past two weeks, declining 8.4% since July 26th despite what has been a stable market for the cannabis sector as measured by my proprietary Cannabis Stock Index, which is roughly unchanged. The ETF, which has over C$120mm in assets, is trading more than 12% below the $10.00 IPO price from April.

When the pioneer fund debuted, we pointed to our disappointment with the composition of the ETF (and its index), as it doesn’t really represent the industry. From a high level, it is heavily weighted towards Canadian LPs, but it includes an almost equally large exposure to cannabis or cannabis-related biotech companies, including Arena Pharmaceuticals (NASDAQ: ARNA), which we believe is totally inappropriate, and GW Pharma (NASDAQ: GWPH), Insys Therapeutics (NASDAQ: INSY) and Zynerba (NASDAQ: ZYNE), all of which are under pressure.

HMMJ posts its holdings daily, and the top 10 holdings represent 77% of the fund:

In addition to GWPH at 9.9% and INSY at 6.7%, the fund has a current position in ARNA at 2.5% and in ZYNE at 2.2%, giving it total exposure currently of 21% in the biotech sector.

The recent sharp declines in GWPH, INSY and ZYNE have hurt HMMJ over the past two weeks:

During that same time-frame, the larger Canadian LPs that trade on the Toronto Stock Exchange, including Aphria (TSX: APH) (OTC: APHQF), Aurora Cannabis (TSX: ACB) (OTC: ACBFF), CanniMed Therapeutics (TSX: CMED) (OTC: CMMDF), Canopy Growth (TSX: WEED) (OTC: TWMJF) and MedReleaf (TSX: LEAF) (OTC: MEDFF), which is not part of the ETF, have outperformed the ETF with the exception of Aphria:

For those who want to invest in the cannabis sector, we continue to see HMMJ as an expensive way to do so given the 0.75% annual management fee. More importantly, investors can build a better portfolio by selecting among the Canadian LPs and perhaps considering names more leveraged to the U.S. state-legal cannabis market. New Cannabis Ventures recently began publishing and updating a public company revenue ranking as a resource that may prove helpful for those investigating cannabis stocks for potential investment.

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Exclusive article by Alan Brochstein, CFA

ab-byline-ncvBased in Houston, Alan leverages his experience as founder of online communities 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.

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