Cannabis ETFs have lit up this year as a combination of Joe Biden-led proposals and Reddit trends see the divisive sector claim the spotlight, however, doubts remain over whether current optimism will blossom into secular growth.

The two ETFs offering exposure to the sector have been the best performing strategies on the European ETF market by some distance in 2021.

Highlighting this, the $44.1m Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR) has returned 45.2% so far this year, as at 12 February, the most across all European-listed ETFs, while HANetf’s $54.3m Medical Cannabis and Wellness UCITS ETF (CBDX) has jumped 43.2%.

This continues on from the strong performance last year with CBDX returning 99% in the year to 12 February, while FLWR has boasted returns of 87% since its launch on 12 February 2020, according to data from ETFLogic.

However, some wind has been taken out of the industry’s sails by the surge and slump nature of the recent Reddit short squeezing. With S3 Partners estimating a total of $4.9bn of shorts in the top twenty cannabis companies, Reddit users spent the week piling into US and Canadian cannabis stocks to replicate their efforts with GameStop. 

Having initially inflated the value of US marijuana equities, the inevitable day-trader exit saw many stocks then crash by as much as a third in the latter stages of the week. Indeed, having rallied by 36.1% in the first ten days of February, FLWR watched its returns get slashed by 4.9% on 11 February alone.

Thankfully, the long-term trajectory appears to be steadier and more positive than the events of this week would suggest.

The first and more widely reported cause for this optimism is the expectation of regulatory reform and the legalisation of cannabis at a Federal level in the US. 

So far, US vice president Kamala Harris’s election promises and Biden entering office have been enough to bolster cannabis ETFs in the early stages of 2021. The new administration’s favourable stance on cannabis will likely continue to support stock valuations, with Rize ETF co-founder, Rahul Bhushan, calling the arrival of the Democrat candidate an “important inflection point” in the industry’s timeline. 

What has been created is a unique asymmetric risk-reward in these initial stages of price discovery because we’re starting at a very low base,” Bhushan continued.

“The end of the Trump presidency on 20 January brings a significant likelihood of federal cannabis reform, one of Joe Biden’s key campaign promises.” 

However, while regulatory reform will help to ease the legal and public opinion barriers to the broader adoption of cannabis products, Bhushan argued the efficacy and diverse applications of cannabis will be the key drivers of acceptance and sustainable growth. 

Indeed, there are more than 25,000 emissions-reducing products that can be made from hemp – such as natural fibre composite automotive parts and carbon-neutral hemp-based concrete – which align with the ‘Biden Plan for Clean Energy Revolution and Environmental Justice’. 

Also, in terms of health applications, the uptake of CBD-derived medicine (Epidiolex) since 2018 has been positive, but CBD is just one of at least 113 cannabinoids - with research currently being done on CBN, CBG, CBL and CBC, as well as the properties of terpenes and flavonoids. 

“Amid the ongoing opioid crisis, legalising cannabis at the federal level would lead many clinicians and patients to reduce their use of highly addictive opioids and create significant business opportunities for pharmaceutical manufacturers of both pure cannabis (for medicinal purposes) and cannabis-derived pharmaceuticals.” Bhushan added. 

At present, there are also three synthetic cannabis-derived medicines with FDA approval – AbbVie’s Marinol (dronabinol), Benuvia Therapeutics’ Syndros (dronabinol), and Bausch Health’s Cesamet (nabilone) – with more set to be developed should regulatory reform trigger more intensive investment in research and development. 

Bhushan continued: “We have always believed that the medical cannabis story is a secular one. Today, we believe the medical cannabis is in the early stages of a multi-year, efficacy-led bull market that will buoy companies across the medical spectrum.”  

Looking to the future, the hope for medical cannabis is that further applications will be found beyond existing treatments for multiple sclerosis, some cancers, and rare forms of child epilepsy.  

The problem is that with cannabis products and regulation being in a stage of flux across much of the western world, laws may change or even subsequently revert.  

The impacts of such risks will naturally be reflected in ETF returns, with worst-case scenarios including shares being delisted from certain exchanges, and trial-stage medical products failing entirely.

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