The legal marijuana industry is a nascent space that many investors believe is full of tremendous potential. However, with political and regulatory winds always changing, it has so far proven incredibly difficult for companies and investors to fully capitalize on this. It seems that almost every day there is news about a shift in legal status, a change in regulation and oversight, or some other adjustment.
At the same time, though, marijuana exchange-traded funds (ETFs) have been in a holding pattern of sorts, according to etf.com. Indeed, so far in 2018, there have been no new marijuana ETFs introduced into the market. There haven’t even been any filings for new marijuana ETFs. Considering just how tremendously popular the ever-growing field of ETFs is at this point, this alone is a sign that the marijuana ETF space has faced growing setbacks in recent months. (For more, see: Want to Make Money In Marijuana? Read This First.)
The Future Remains Unclear
The biggest issue that faces marijuana ETFs at this point is the form in which they will continue to exist into the future. Up to this point, many banks have refused to bear the potential legal and reputation-related risks associated with backing ETFs that track stocks that remain illegal at the federal level, or at least when it comes to ETFs that are explicitly linked to cannabis.
For the two marijuana-themed ETFs currently available, the ETFMG Alternative Harvest ETF (MJ) and the AdvisorShares Vice ETF (ACT), the approach to this issue has been different. The former managed to circumvent its custodian as a result of swapping in a cannabis index for an existing fund’s benchmark, then relaunching the ETF. The latter of these funds launched as a fund offering non-pure-play cannabis exposure and then partnered with its custodian to carefully choose securities that had been registered with the Drug Enforcement Agency. In each case, tensions between ETF managers and custodian banks have run high. (See also: Alcohol, Tobacco and Pharma Investing in Pot as Hedge: Moody’s.)
A Dip in Performance
While marijuana ETF managers are carefully navigating the relationship their products have with custodian institutions, trading remains a concern as well, just as it would for any other ETF. According to etf.com, MJ “continues to trade, and with healthy volume,” having climbed to around $366 million in assets. At this level, it is a notable breakout star of the ETF space for 2018. ACT is significantly smaller, with just $12.5 million or so in assets.
While trading volume for MJ has been steady, performance for both funds is less so. Both of these ETFs have had a poor showing so far in 2018, with MJ falling by more than 12% year to date and ACT declining by 5% since the start of 2018.
The drop in performance for these ETFs comes as no surprise, considering that marijuana stocks more broadly have tended to collapse in the past several months. These stocks have suffered for several reasons, among them shifting statements from the Trump administration on marijuana’s legal status, issues with the rolling out of legalization in Canada and more. As a reference, the North American Marijuana Index, tracking both U.S.- and Canada-based pot companies, has fallen by 21% so far this year.
With stock performance declining, both marijuana ETFs have seen inflows drop as well. MJ brought in $377 in inflows in January 2018 alone, but since February, it has managed to bring in only $33 million in total. For the month of March, it had outflows of $2 million. ACT has had a difficult time maintaining investor assets, having brought in only $5 million so far this year.
With uncertainty about the future of marijuana stocks in the U.S. at the front of investors’ minds, it’s perhaps unsurprising that marijuana ETFs have yet to take off in the ways that some had hoped for. Nonetheless, supporters of legalization movements undoubtedly believe that, over the long term, marijuana-linked investment products will prove to be a worthwhile venture. (For additional reading, check out: On 4/20, NY Senator Chuck Schumer Floats Bill to Legalize Marijuana.)