Cannabis ETFs are capturing the imagination of investors across the Atlantic more than any other product this year, however, it remains unclear how long it will be before ETF providers in Europe look to take part in this gold rush.
The number of products listed in the US and Canada has exploded. On Wednesday, Amplify became the fourth provider in three weeks to enter the space with the launch of the Amplify Seymour Cannabis ETF (CNBS).
This has been driven by a number of factors. One key driver has been the legalisation of medicinal and recreational use in more US states and Canada in October 2018.
Furthermore, the inflows gathered have been proportionally huge. Both ETFMG’s Alternative Harvest ETF (MJ) and Horizon’s Marijuana Life Sciences Index ETF (HMMJ) have seen over $1bn inflows into their respective products.
These assets have not gone unnoticed with niche US providers such as Amplify, along with others such as Cambria (TOKE) and Innovation Shares (THCX), reacting by launching their own products in the past few weeks.
The usual suspects are yet to enter the space and, despite reports circulating BlackRock are eyeing up a potential launch, there are reputational risk concerns for these players.
Without the big players at the table, the smaller providers have been able to keep their total expense ratios (TERs) relatively high – pardon the pun – with TOKE the cheapest at 0.59% while the most expensive is HMMJ at 0.87%. In simple terms, higher TERs mean more profits.
This year’s strong performance has also driven flows. Since the start of the year, MJ is up 23.1% while HMMJ has returned 23.6%, as at 18 July.
Despite the huge potential a cannabis ETF has to capture flows, a number of stumbling blocks remain before European investors will be able to access the latest thematic trend.
One issue is the legality of the product. Cannabis remains illegal across many European countries including the UK.
Because of this, one industry expert said European ETF providers are having difficulty finding service providers to support a launch as they do not want to be involved in something that remains illegal in many countries due to the potential for reputational damage.
Furthermore, the investment opportunity remains questionable. ETF Stream has written extensively on how cannabis stocks may be in bubble territory.
One issue is in US states where recreational cannabis is legal, dealers are reporting oversupply issues and big price drops.
Peter Sleep, senior investment manager at 7IM, warned investors to prepare for a lot of volatility if they invest in a cannabis ETF.
“I am not a big fan of thematic ETFs,” he added. “They tend to be faddy, volatile and exploitative. Cannabis is not exactly a new field. There have been ETFs around for several years in North America and I am not convinced that investors will be best served buying them.”
Although an ETF structure could be "useful", James McManus, head of ETF research at Nutmeg, warned the relatively new nature of the sector meant there is still potential for regulatory shifts.
"The fear with any rapidly expanding sector is that the large growth expectations could go up in smoke due to unknowns," he added.
It’s clearly a budding industry, and some Cannabis stocks have been on a roll. However, it’s a relatively new sector so there are likely to be highs and lows as regulation shifts and which companies succeed could be pot luck – thus an ETF could be useful. The fear with any rapidly expanding sector is that the large growth expectations could go up in smoke due to unknowns.
However, there a number of signs an ETF may be a useful addition to the European landscape. According to the International Narcotics Control Board (INCB), the UK is the world’s largest producer of legal cannabis, exporting 44.9% of the world’s total cannabis for medicinal and scientific use.
Furthermore, the Church of England has given the green light for its £12.6bn portfolios to invest in medicinal marijuana.
Edward Mason, head of responsible investment at the Church Commissioners for England, told the Financial Times the church is “content with it being used for proper medicinal purposes”.
There is no doubting the big assets a cannabis ETF will gather in Europe. It is well documented the benefits of being the first mover and, while there are many hoops for providers to go through, it could be sooner than investors are expecting.