You Can Invest in a Cannabis Mutual Fund—But Should You?Alan Brochstein, The Cannabis CapitalistMay 14, 2018
Until late 2016, there were no cannabis-focused mutual funds or ETFs. Late that year, a mutual fund, American Growth Funds (AMREX), changed its mandate and began to focus on the cannabis sector with its Series Two fund, becoming “the first diversified mutual fund focused on the cannabis business.”
At last report the Series Two fund has been a complete disaster. The fund has performed poorly and failed to grow assets. As of January 31, 2018, its semi-annual report revealed the size of the fund as just $895,009, which isn’t sufficient to adequately cover the fund’s expenses. Finally, a review of the holdings reveals the names of companies that aren’t really cannabis-related—like Valeant Pharmaceuticals, Vestas Wind Systems, Microsoft, and Abbott Labs—as well as some stinkers, like Grow Condos, MassRoots and CannaGrow Holdings.
Heavily Into Canadian LPs
Things changed in 2017 when UIT Alternative Health Fund, run by Faircourt Asset Management, converted from UIT Global REIT Fund. The fund is only partially focused on cannabis, as it also invests in the broader nutritional and nutraceutical market as well. UIT Alternative Health reported assets of C$10.39 million as of April 30, with its top ten holdings consisting of mainly large Canadian licensed producers, including Aphria, CannTrust, Canopy Growth, Hydropothecary, MedReleaf and Organigram. GW Pharma is a top position as well, but the balance includes Jamieson Wellness, Pinnacle Foods and UnitedHealth.
Fund managers described its sector allocation as 42.2% cannabis LPs, with the remaining exposure in other wellness (16.4%), cash (16.2%), pharmaceuticals and health technology (15.5%) and organics, supplements and nutraceuticals (10.0%). In the year ending April 30th, it reported a return of 40.77%.
An ETF on the Rise
Making a bigger splash was the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ) (OTC: HMLSF), which now boasts assets of C$730 million and trades very actively. I was somewhat critical of the fund when it debuted, suggesting that its construction was poor and that investors could replicate it on their own quite easily (avoiding a management fee of 0.75% per year), but the fund’s composition has improved significantly.
The top 10 holdings are mainly Canadian licensed producers with the exception of GW Pharmaceuticals (10.8%) and Scotts Miracle-Gro (8.1%). For investors interested in the Canadian sector but who either aren’t investing a large enough amount of money to spread it across several holdings (due to commission charges) or who don’t want to pick stocks, I think HMMJ is a reasonable option at this point.
Horizons followed up HMMJ with an offering that I like conceptually but that hasn’t been well received. The asset value of the Emerging Marijuana Growers Index ETF is only C$12.5 million, with very low trading volumes. The fund trades on the NEO exchange in Canada with the symbol HMJR. There is also a listing on the OTC Pink Sheets, where it appears as HZEMF. What I find appealing is the exposure to smaller companies as well as some investments in companies operating in the U.S. There are also investments in Australia.
Little U.S. Exposure
The most recent substantial new fund was the ETFMG Alternative Harvest Fund, which trades on the NYSE Arca with the symbol MJ. This was previously the Tierra XP Latin America Real Estate ETF, but it changed its focus in December. The timing was excellent, as the fund rapidly expanded its assets early in 2018 as the media focused on California legalization, and assets are now about $378 million dollars.
Ironically, though, this first U.S.-listed cannabis ETF has little or no exposure to the U.S. cannabis industry. Most of its top holdings are Canadian licensed producers, though it has a 6.8% position in GW Pharmaceuticals. While its largest holdings are at least cannabis-related (with the exception of Corbus Pharmaceuticals), many of the remaining holdings are not at all related to cannabis at this time. Some of the holdings that I find almost comical are Vector Group, Scandinavian Tobacco, British American Tobacco, Altria Group and Philip Morris International. The fund declined 11.75% in the first four months of the year.
The bottom line here, in my view, is that investors are much better off buying the HMMJ fund than this one if they want exposure to Canadian licensed producers.
What About Smaller Funds?
There are some other small funds as well, which I am not discussing due to their limited trading volume and small size. These include the Marijuana Opportunities Fund (MJJ on the NEO) and Evolve Marijuana ETF (SEED on the TSX). Finally, while these are operating companies and not mutual funds, Cannabis Growth Opportunity Corp (CGOC on the CSE) and Quinsam Capital (QCA on the CSE) may have appeal to investors looking to align with professional investors.
Bottom line: For those that like the diversification that a mutual fund or ETF can provide, the cannabis industry now offers several different investment options. The Horizon offerings appear to offer the best portfolios, but they are narrowly focused on Canada. For those who want to invest in the U.S. cannabis industry, there aren’t any attractive options at this time.
Next up: I discuss which publicly-traded cannabis companies are generating the highest level of sales.
As an owner of New Cannabis Ventures, Alan works with several publicly-traded and privately held cannabis companies as he discloses here. In the event he mentions a company that is a client, he will disclose it in the article as well.