If you are interested in investing in marijuana stocks but don’t know the best way to get started, you may want to take a closer look at the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), a marijuana-themed exchange-traded fund (ETF) that has over a $1 billion in assets under management.
Before we discuss the details and outlook of this marijuana ETF, let’s take a quick look at the legalized Marijuana Industry (MI) — a nascent but growing industry that has helped add to the popularity of marijuana stocks.
Why Are Marijuana Stocks Hot Right Now?
The general public does not know the difference between cannabis, marijuana and hemp very well. Thus people often use these three terms interchangeably.
“Cannabis Sativa” is the botanical name of the plant species. This plant has different strains, one of which is “Industrial Hemp” and the other which is “Marijuana.” Therefore hemp and marijuana are sometimes referred to as ‘cousins.’
Industrial Hemp naturally has high levels of CBD and low levels of tetrahydrocannabinol (THC). THC is behind the “high” from smoking marijuana; in other words, hemp does not have the psychoactive properties of marijuana. Hemp cannot contain more than 0.3% of this psychoactive ingredient THC.
Marijuana has high levels of THC and lower levels of CBD.
In 2018, Canada legalized marijuana federally, a step that gave a big boost to pot stocks, such as Canada-headquartered Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), Cronos Group (NASDAQ:CRON) and Tilray (NASDAQ:TLRY). Canada is the first G7 nation to legalize marijuana nationwide.
The Outlook for Pot Stocks in the U.S.
At the federal level, marijuana is still illegal in the United States and remains a Schedule I drug. However, at the state level, the legal status of marijuana depends on the laws of the individual state.
Legalization allows for both individual marijuana possession as well as the legal production and sale of the drug. Legalization can happen in two categories: the legalization of recreational marijuana or the legalization of medical cannabis.
As both the recreational and the medicinal use is becoming more widely accepted, the number of U.S. states that have legalized it has increased. Medical cannabis is now legal in 33 states. Recreational marijuana is legal in 10 states, i.e., individuals require no prescription to use marijuana in these jurisdictions.
In other words, the legalized marijuana industry is still in its infancy … even in Canada and it is almost non-existent globally. None of the Canadian marijuana stocks have so far done any business in these pot-friendly U.S. states, as the listing requirements at the NYSE or NASDAQ as well as at the Toronto Stock Exchange (TSE) bar companies from engaging in commercial activities in countries where they would be breaking the law.
On the other hand, in December 2018, the U.S. Congress passed the Farm Bill, which President Trump later signed into law. The Bill legalized hemp and hemp-derived ingredient cannabidiol (CBD), especially popular among consumers seeking relief from physical pain. Because hemp is now an ordinary agricultural commodity in the U.S., farmers can apply for federal hemp cultivation permits.
For example, in January, Canopy Growth announced that it has obtained a license to process and produce hemp products in New York State. The legalization of hemp and CBD are currently opening new doors for Canadian firms that have been previously unable to enter the U.S. market.
Thus, it would not be wrong to assume that if and when the U.S. federal legalization of marijuana occurs, these Canada-based companies may be among the first marijuana stocks to benefit from the changing legal scene … and thus, the MJ ETF would also benefit.
As such, investing in the industry through a thematic marijuana ETF such as MJ might be appropriate for some investors.
Could Your Portfolio Benefit From the MJ ETF?
At InvestorPlace, my colleagues often cover how various ETFs can help investors construct a diversified portfolio. An ETF is an index-tracking fund that trades on a major stock exchange. Similarly, MJ seeks to provide investment results that correspond to the total return performance of the Prime Alternative Harvest Index, which tracks the performance of U.S. and global companies that are engaged exclusively in legal activities involving cannabis for medical or non-medical purposes.
In general, an ETF has an expense ratio — a percentage of the fund’s assets are used to cover management and other costs to run the fund. MJ’s expense ratio is 0.75% per year, or $75 annually per $10,000 invested. Several of the major pot stocks in the MJ ETF include Aurora Cannabis, GW Pharmaceuticals (NASDAQ:GWPH), Cronos Group, Canopy Growth, Tilray and Green Organic Dutchman Holdings (OTCMKTS:TGODF) — companies that are becoming increasingly mainstream.
Depending on their brokerage accounts, investors can buy the MJ ETF on margin, trade options on it or even sell shares of it short. It currently pays dividends with a yield of 1.7%. In recent months, this marijuana ETF has become one of the most popular funds among millenial investors.
What Can Investors Expect from Marijuana Stocks in 2019?
In the past two years, marijuana stocks have been choppy and highly speculative. Their valuations can and do change suddenly and drastically, both as a result of event-driven company news or developments in the industry.
And the value of this particular marijuana ETF reflects this volatility. Year-to-date, the MJ ETF is up 48%. After seeing an intraday low of $23.3 on Dec. 26, it has rallied to a high of $39.25 on March 19. Its 52-week high remains at $45.4, reached on Sep. 19.
From a fundamental perspective, 2019 as well as the next few years are likely to see important developments in the industry. There might be consolidation as well as partnerships between Canadian pot stocks and more established U.S. companies.
For example, in August 2018, the alcoholic beverages giant Constellation Brands (NYSE:STZ) announced a $4 billion investment into CGC, and STZ now holds a 38% stake in the company. The two are currently developing cannabis-infused beverages for Canada, where experts believe they will be legal by 2020. We may expect similar developments regarding other marijuana stocks in the months to come.
One fundamental point that investors need to keep in mind is that most of these pot stocks are not profitable yet. Analysts value them mostly based on the expectation of high revenue growth, which would lead to future profits. Therefore, whenever Wall Street fears the given company is failing to meet growth or expectations, that pot stock will get penalized.
Those investors who pay attention to technical charts should note that the shorter-term oscillators are giving “overbought” readings and signalling further profit-taking. From a price and time cycle perspective, the high reached on March 19, 2019, which came six months after the 52-week high of March 19, 2018, is likely to be the highest price to be seen in the near-term.
Within the next two months, I expect MJ to mostly range-trade between $30 and $35. However, in case of a broader market selloff, similar to the one we have witnessed in the last quarter of 2018, the fund may easily go toward the mid-$20’s level.
The Bottom Line on the MJ ETF
Investors will need to follow developments in the industry closely to evaluate the appropriateness for marijuana stocks for their portfolio. Long-term investors should be ready for daily price fluctuations as well as high volatility around the earnings release dates of the marijuana stocks that make up the MJ ETF.
If you already own this marijuana ETF, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-7% below the current price point.
If you are an experienced investor in the options market, you may want to protect your portfolio or your recent gains in marijuana stocks with a covered call or possibly a put option spread with a three-month time horizon. If you do not yet hold a marijuana ETF like MJ, you may want to wait several weeks to buy into it at the next dip.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.