Now that the Canadian Senate has passed the bill for the legalization of recreational marijuana, the way is open for a fully legal cannabis market, starting October 17, 2018. That heightens the already-fervent interest in marijuana stocks.
Overall demand for marijuana will continue to expand. But what’s less certain is which marijuana growers will prosper in the long term and which will not.
All marijuana growers face similar risks. It’s unclear what the regulations will be from province to province and branding will be very difficult. That’s because it looks like cannabis must be sold with plain packaging that is a single, uniform colour and does not include any graphics or images.
As well, there are low barriers to entry for new marijuana producers. If demand grows large and profitable enough, major agricultural and drug companies as well as tobacco firms are likely to enter the field and take sales away from established growers.
Small or start-up marijuana producers have to overcome those obstacles—as well as all the usual obstacles that small and start-up companies face.
Here’s an ETF that focuses on those smaller marijuana stocks. It was profiled in our advisory on exchange-traded funds, Best ETFs for Canadian Investors.
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HORIZONS EMERGING MARIJUANA GROWERS ETF $8.22 (Aequitas NEO Exchange symbol HMJR; TSINetwork ETF Rating: Aggressive; Market cap: $12.2 million) invests in small, publicly listed companies primarily involved in the cultivation, production and distribution of cannabis. The emphasis is on early stage, small-cap companies with growth potential.
The ETF will focus mostly on Canadian and U.S. firms, but may also invest up to 20% of its assets in international stocks. Right now, it has about 80% of its holdings in Canadian stocks and 20% in Australian stocks.
Horizons Emerging Marijuana Growers ETF trades on the Toronto-based Aequitas NEO Exchange. It is recognized by the Ontario Securities Commission and backed by major financial firms such as Barclays and Royal Bank. Investors should be able to place orders for these units through their full-service or discount brokers.
The ETF holds 26 companies. Top holdings include TerrAscend (Canada, 12.6%), MPX Bioceutical (Canada, 10.5%), Cann Group (Australia, 8.9%), Hydropothecary (Canada, 8.6%), Auscann Group (Australia, 7.5%), WeedMD (Canada, 5.3%), Maricann Group (Canada, 4.3%), Benchmark Botanics (Canada, 3.5%), Emblem Corp. (Canada, 3.4%) and ABcann Global Corp. (Canada, 3.2%). The top six make up a big 53% of assets.
The biggest holding, Toronto-based TerrAscend, aims to provide support to patients using marijuana through its subsidiaries—Solace Health Inc., a licensed producer of medical cannabis, TerraHealth Network Inc., a clinical support program and education platform led by health-care professionals, and SolaceRx, a proposed drug preparation premises for the compounding of non-cannabis formulations for a variety of institutions. TerrAscend holds a high $45.7 million in cash. However, in the three months ended March 31, 2018, the company had no revenues and lost $2.3 million.
The Horizons Emerging Marijuana Growers ETF’s has a relatively high MER of 0.85%.
This fund started up February 13, 2018, but has so far failed to attract significant investor interest. The result in an asset size of $12.2 million, with limited liquidity for investors. The legal cannabis market is developing quickly, but there are significant industry and regulatory risks for all participants.
Although there may be success stories among the smaller companies, they face considerably more risk than larger competitors. Still, even with their size, those bigger growers also carry risk for investors.
Recommendation in Best ETFs for Canadian Investors: We don’t recommend the Horizons Emerging Marijuana Growers ETF.
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