Marijuana niche gets popular, but is the sector a bubble?

Innovation Shares is listing a new marijuana ETF, in what is becoming one of the most popular thematic niches in 2019.

The Cannabis ETF (THCX) will invest in an index of cannabis companies, which are defined as those making 50% of their revenue from marijuana and hemp. The fund holds 35 stocks at the time of writing. It charges 0.95%.

THCX is Innovation Shares second ETF. It joins a crowding market of marijuana funds, which is soon to also include products from Amplify and Global X.

Ticker Fund Name Domicile AUM (US$ millions) TER (% p.a.) Inception
MJ ETFMG Alternative Harvest ETF USA $1,150.00 0.75 2015
HMMJ Horizons Marijuana Life Sciences Index ETF Canada $1,097.28 0.87 2017
YOLO AdvisorShares Pure Cannabis ETF USA $60.20 0.74 2019
ACT AdvisorShares Vice ETF USA $14.07 0.75 2017

Analysis – Nice idea, but I’m not stoned enough 

Everyone knows marijuana stocks are in a bubble. To give a quick shopping list of reasons why:

  1. Marijuana is a weed you can grow in your backyard. It is not like tobacco or coffee which are capital and labour intensive to grow. There are no barriers to entry in marijuana farming and never will be.
  2. Relatedly, jurisdictions where marijuana commands a high price do so precisely because it is illegal. Criminalisation is what creates barriers to entry. Dealers and farmers face legal risk and the risk they face has to be compensated.
  3. In states where recreational marijuana is legalised, like Oregon, dealers are already reporting oversupply and massive price drops.

Having said all that, listing a marijuana ETF – or any ETF that tracks a bubble – is kind of smart. Why? Another shopping list:

  1. Your assets will go up faster, carried by the bubble.
  2. The niche exposure allows you to charge a higher margin.
  3. As publicly traded products, ETFs are an appropriate vehicle for catering to the bubble buying retail crowd who enjoy playing hot potato with overvalued stocks. (For those wishing to view such creatures, visit Reddit group Wall St Bets)
  4. You can roll out bubble trackers in safe knowledge that Vanguard and BlackRock won’t chase you, as they’re too concerned about reputational risk.

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Image: Australian police use this featured image to show how just two marijuana plants, with only wires to support them, can be used to make commercial quantities of the drug. While the police use this photo to make a policy point, I’d argue it equally makes a commercial point.

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