Canada will be the home to the first ever exchange traded fund (ETF) solely tracking cannabis-related corporations. Essentially, an ETF is a marketable security traded on a stock exchange, but instead of only tracking one specific company, acts an as index to a basket of different assets. In this specific case, the Horizons Medical Marijuana Life Sciences ETF bundles 16 stocks, including 11 Canadian ones, with none weighing more than 10% of the overall fund (see graph below). The Toronto Stock Exchange was the prime choice for the fund managers, since speculations about full legalization of recreational use have been mounting rapidly. The country has had legal medical-related use of marijuana since 2001 and current liberal administration promised to fully legalize usage by July of 2018. Even though cannabis may be legal in certain states of America, it is still prohibited at the federal-level and therefore makes access to openly traded capital quasi-impossible for corporations, since financial institutions are often regulated by the Federal Deposit Insurance Corporation.
Several analysts are comparing this industry to start up tech stocks as trading of these companies has been awfully based on speculations and pricing on post-legalization sales. The main driving factor of valuation for the index is the previously mentioned speculation of full legalization of marijuana in Canada. These companies would access an extremely larger market and could expect significant growth. Current returns in the pot industry have been rather mouth-watering: Aurora Cannabis climbed 50% during its last two quarters and Apharia, largest component of the ETF, is up by 89% over the same period. ETFs are typically considered less risky, as they bundle several companies, are usually very liquid and have low management fees. Although, Medical Marijuana Life Sciences is likely to be exposed to important exchange-rate risks between the Canadian and the American dollar, as well as a critical market correction in 2018. Thus, valuation will then be more balanced between hard figures and expectations, rather than mostly relying on speculations.
Steve Hawkins, president and co-CEO of Toronto’s Horizons ETF: “It’s a young industry, and it’s evolving daily […] It has the growth that internet companies once did.”
This situation may also be an incentive to progress of legislation in the United States, since it involves potentially substantial economic development and tax revenue. On an international scale, the illicit drug industry is valued at more than $150 billion, which a large part is attributable to the United States. Medical and recreational cannabis sales in the States reached $6.7 billion in 2016, an increase of 25% to the previous year. Besides, the issue of the new Trump administration comes into play while Jeff Sessions, a fervent marijuana opponent, has been named U.S. attorney general. As press secretary Sean Spicer declared in February, federal enforcement will be perhaps amplified and marijuana stocks could then be flooded with important corrections.
Julien David Mousseau