Product Panel: Purpose’s medical cannabis ETF

Cannabis ETF

The Medical Cannabis and Wellness UCITS ETF (CBSX) is Canadian ETF provider Purpose Investments’ first ETF in Europe via white-label provider HANetf on the Deutsche Boerse later this month.

The fund targets exposure to the expanding medical cannabis industry. Medical cannabis and Cannabidiol (CBD) products are now legal in over 40 countries with more expected to follow suit this year and beyond.

The fund’s promoters point out the global medical cannabis market size was worth $13.4bn in 2018 and it is expected to reach a value in excess of $148bn by 2026.

What the provider says:

“The medical cannabis industry was pioneered in Canada, and we’re thrilled with the opportunity to partner with HANetf to take what we have learned from our Purpose Marijuana Opportunities Fund (MJJ) to Europe,” Som Seif, chief executive of Purpose Investments, said.

“We believe that the cannabis sector is still in the infancy stages of a multi-year growth phase and that there is ample opportunity for innovation and new discoveries.”

What the panel says:

Rumi Mahmood, investment analyst at Nutmeg

A blazing entry to 2020’s new ETFs; CBSX presents an interesting opportunity to invest in an emerging healthcare. It is worth noting the index provides exposure to more than just cannabis growers and encompasses the supply chain in this segment, from R&D focused biotech firms to equipment and service providers.

At 0.80% it is on the more expensive end on the ETF expense ratio scale, however, in line with fees associated with thematic products.

The medical marijuana sector has been growing rapidly and is expected to continue with the advent of new pharmaceuticals and increased adoption.

However, as with all thematic products that focus on niche, growth industries at the infancy stage, investors should be comfortable with higher volatility; if we look at cannabis-focused products listed in North America, performance has been sub-par in the last year.

Irene Bauer, founder and CIO at Twenty20 Investments

It is perhaps no surprise to see that HANetf has been the first provider in Europe to provide access to this new market.

We have been watching the buzz last year around marijuana ETFs in the US and Canada, especially with retail investors.

With a subsequent drop of around 50% maybe this exposure offers more attractive entry levels with good upside potential, but investors could feel the riskiness of this investment too.

Peter Sleep, senior investment manager at 7IM

I understand the controversial nature of this ETF made it more difficult to launch in Europe, but that seems to have been to the advantage of the European investors as a lot of the hype in North American cannabis-related stocks seems to have dissipated, possibly appealing to value investors.

I have previously expressed scepticism regarding thematic ETFs, given their narrow and often volatile nature and this ETF seems to be a case in point.

If my maths is correct, nine of the 13 component stocks in CBSX are loss-making, to the extent that in many cases losses exceed sales.

Sure, this may be a function of early-stage growth, but this ETF could be very volatile and the volatility may not be adequately rewarded.

Perhaps it is not surprising that many of the stocks in the ETF are also small cap. I wonder what impact this ETF might have should it successfully gather assets.

For instance, 22nd Century Group (XXII US) has a market cap of only $137m but has a nearly 9% weighting in the ETF. ETF Managers Group LLC (the manager behind the ERFMG Alternative Harvest ETF) already owns 10% of this company and it is easy to see that a successful ETF launch in Europe could drive the share price, independent of the underlying company performance.

Ben Seager-Scott, head of multi-asset at Tilney

This new ETF is the latest offering the from HANetf, which has enabled the launch of some niche products recently, which nonetheless are likely to find some buyers somewhere in the market.

This ETF follows in that trend, with Cannabis-related investment vehicles receiving a lot of news flow over the past couple of years amid changing attitudes in many countries towards the medicinal use of cannabis.

With any ‘thematic’ type fund, however, I normally sound a note of caution to consider the full investment case of a theme, and try to resist getting caught up in a narrative fallacy.

This goes double for cannabis-related ETFs, where there is much talk about the potential long-term size of the market, but I would suggest much less understanding of the profitability and valuation that should come with it.

This difficulty in assessing the investment case may explain why one of the most popular cannabis-related ETFs in the US fell over 30% last year, and should serve as a warning to investors on this side of the Atlantic.

I do not see it gaining much professional interest in the immediate future, but I am sure there will be some investors out there willing to take on what I would say is a particularly speculative investment. As long as they do so fully cognisant of the risks, I wish them the best of luck.

Nicolas Rabener, managing director at FactorResearch

Cannabis has been a minor theme in the investment industry as legislation in the US and other countries became more friendly and the universe of ETFs in the US for accessing the sector grew substantially last year.

These currently manage less than $1bn, although 80% of the assets are held by ETFMG’s Alternative Harvest ETF (MJ), which is also the oldest marijuana ETF.

Purpose’s launch of CBSX might also benefit from this first-mover advantage as it is the only ETF traded in Europe that is focused on this growth industry.

However, investors tend to be performance chasing and the returns of marijuana stocks were negative in the last 12 months.

Purpose’s equivalent ETF in Canada was launched in January 2018 and is currently trading at its issue price. Having said this, further deregulation in US states or perhaps even on federal level might easily get the sector’s mojo going again.

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