What's Going on With Marijuana ETFs?

Why marijuana stocks moved

Marijuana companies are notorious for their challenging financials. For instance, Canopy Growth posts an operating margin of -31.75% and has suffered an operating cash flow of -$399.63 million over the last twelve months.

Similarly, Tilray Brands hasn't fared much better, with a -16.54% operating margin and -$18.01 million in operating cash flow during the same period.

These companies aren't fledgling startups either; they've been around since the first marijuana stock frenzy in 2017, burning through cash without the rapid growth to justify such losses.

Thus, the recent surge in their stock prices isn't tied to any improvements in their fundamentals. Rather, it's driven purely by speculative excitement following legislative changes.

Specifically, the buzz is about the Biden Administration's plans to reclassify marijuana as a Schedule III substance. What does this mean for marijuana?

Currently, it's federally classified as a Schedule I substance, placing it in the same legal category as heroin and methamphetamines. According to the U.S. Drug Enforcement Administration (DEA), Schedule I substances have "no currently accepted medical use and a high potential for abuse."

Reclassifying marijuana as Schedule III would align it more with substances like anabolic steroids, codeine, and even Tylenol, which the DEA notes as "drugs with a moderate to low potential for physical and psychological dependence."

This shift could significantly alter the legal landscape for cannabis, sparking investor interest and speculative trading based on potential future profitability under new regulations.

Marijuana ETFs to watch

In this volatile industry, I personally prefer using ETFs over picking individual stocks for exposure to the cannabis sector. The primary reason? You greatly minimize company-specific risk, which is crucial in a speculative market like marijuana.

When betting on legislative changes that could favor the industry, it's safer to invest in a diversified basket of companies. This way, even if one company underperforms due to operational issues, the broader legislative boost could still benefit your investment through other holdings.

Currently, two main players dominate the marijuana ETF space: AdvisorShares and Amplify ETFs, both of which offer U.S. and globally diversified listings.

AdvisorShares offers the Pure U.S. Cannabis ETF

focusing solely on domestic companies, and the Pure Cannabis ETF

YOLO

, which has a global reach but emphasizes U.S. and Canadian companies. Both are actively managed and primarily invest in mid to micro-cap companies, reflecting the emerging and speculative nature of the cannabis industry.

Interestingly, MSOS utilizes swaps to gain exposure to its U.S. holdings due to regulatory restrictions that prevent direct stock holdings. YOLO, on the other hand, includes MSOS in its portfolio for its U.S. exposure while directly holding some global stocks. Neither is cheap, with MSOS charging a net expense ratio of 0.83% and YOLO at 1.03% after waivers.

Amplify's offerings include the U.S. Alternative Harvest ETF

and the Alternative Harvest ETF

MJ

. MJUS is actively managed, using swaps for its U.S. exposure, while MJ passively tracks the Prime Alternative Harvest Index and holds MJUS along with other global cannabis stocks. MJUS and MJ have slightly lower expense ratios at 0.75% and 0.78%, respectively.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.