Marijuana ETFs soar on Biden's reforms

What the reforms mean moving forward

Jason Wilson, Cannabis Banking Expert at ETFMG was of the opinion that the recent announcement was merely the beginning of a long-awaited and extensive cannabis reform process. Wilson told me:

"Although President Biden did not go as far as Germany recently has by announcing that they will table draft legalization legislation by the end of the year, the President’s acknowledgment that it is time to right the wrongs of the federal government’s failed approach to marijuana, combined with his instructions to the Secretary of Health and Human Sciences and the Attorney General to expeditiously review marijuana’s classification under federal laws, provide a strong and important political statement suggesting that long-awaited cannabis reform may arrive sooner than expected."

This is a highly bullish sentiment evidently shared and anticipated by the market for a long time ever since Biden's 2020 campaign promises. The surge in cannabis stocks was likely a result of the "surprise" from the sudden announcement of these reforms previously discounted as a more remote possibility. 

What Wilson found particularly important was Biden's instructions to the Secretary of Health and Human Services and the Attorney General to expeditiously review marijuana’s status under federal law. Wilson noted that this action effectively commenced the process to reschedule or de-schedule cannabis altogether under the Controlled Substances Act, where it is currently classified as Schedule I, the same classification as the most dangerous substances like heroin and LSD.

That being said, Wilson does not anticipate Biden's actions alone having a short-term material impact on the cannabis industry. "The path to rescheduling or de-scheduling cannabis by way of executive action will be a long and bureaucratic process that will take some time to work through, but Biden's actions did add momentum," he says. 

Investing in marijuana

Investors interested in the marijuana industry can use a variety of ETFs to gain exposure. It's worth carefully examining each fund's construction, methodology, and strategy. Some things to note when conducting your analysis include:

• Is the ETF pure play (holding only marijuana companies), or does it also hold tobacco companies with incidental exposure?
• Does the ETF physically hold the underlying securities, or does it use a derivative like a total return swap to gain synthetic exposure?
• Is the ETF market capitalization-weighted or weighted according to another methodology (common ones include equal weight or weighted by pure-play exposure)?
• What geographies do the holdings in the ETF come from? Is it U.S. only, North America only, or globally diversified?

Depending on your preferences for the above, the following ETFs might be suitable for expressing a long position in the marijuana industry:

• ETFMG Alternative Harvest ETF (MJ)
• AdvisorShares Pure US Cannabis ETF (MSOS)
• AdvisorShares Pure Cannabis ETF (YOLO)
• Amplify Seymour Cannabis ETF (CNBS)
• Global X Cannabis ETF (POTX)
• Cambria Cannabis ETF (TOKE)

Please note this article is for information purposes only and does not constitute investment advice.