There’s no denying that marijuana stocks are hot these days. And for good reason. As cannabis continues to move into legal status for both medical and recreational purposes, the potential is huge. Depending on what study you look at, the global legal marijuana market size is expected to reach more than $66.3 billion by the end of 2025. That’s growing at a compound annual growth rate of more than 23%. With the sector still in the early innings, many investors are looking to cash in on the trend.
The problem is, for every leader, there are plenty of duds as well.
Many marijuana stocks are still small-time players, unprofitable and even trade on the pink sheets/OTCBB exchanges. They can be risky endeavors even for the most aggressive of portfolios. For many investors, that makes playing the trend of marijuana stocks off-limits. Or does it? Thanks to the surge in their popularity, there are now several broad exchange trade funds (ETFs) that tap into the growing industry. Here, investors can get plenty of marijuana stock exposure while reducing their overall risk.
With that, here are three of the best marijuana ETFs to consider.
The ETFMG Alternative Harvest ETF (MJ)
As the first ETF to cover marijuana stocks, the ETFMG Alternative Harvest ETF (NYSEArca:MJ) is the largest fund to cover the sector. Originally, MJ was an unloved and ignored fund that covered Latin American real estate. However, sensing the shift in cannabis, ETFMG decided to change the ETFs’ index and strategy. That move also allowed MJ to avoid many of the regulatory issues associated with launching a marijuana ETF from scratch. That has paid off in that MJ now holds more than $1.3 billion in assets and is a certified hit.
MJ tracks the Prime Alternative Harvest Index, which tracks the entire cannabis ecosystem across both medicinal and recreational uses. This includes firms from the pharmaceutical industries, tobacco, paper products firms and even farm equipment manufacturers that specialize in greenhouse products. Overall, MJ tracks 36 stocks with leaders like GW Pharmaceuticals (NASDAQ:GWPH) and Canopy Growth (NYSE:CGC) as top holdings.
Like much of the sector, the performance of MJ has been pretty volatile. But, its long-term performance has been good and has helped smooth out the ride of owning individual marijuana stocks. Year-to-date, MJ is up more than 46%. While after its switch in strategy, MJ has managed to produce a near-18% annualized return over the last three or so years. That’s not too shabby at all.
Perhaps the only hit against MJ could be its price. Expenses for the ETF run at 0.75%, or $75 annually per $10,000 invested. That’s a little pricey for ETFs these days. However, as the biggest cannabis ETF, it’s worth paying.
AdvisorShares Pure Cannabis ETF (YOLO)
One of the big problems with MJ is that as an index fund, you own everything. That includes the good and the bad. When it comes to marijuana stocks that could add plenty of risk and loss potential to your portfolio. An active touch may be better suited for stocks in the sector.
To that end, the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO) may be a better choice.
Despite the goofy ticker (millennials constantly use “YOLO” to say you only live once), YOLO has some serious muscle behind it. Portfolio manager Dan Ahrens has been making sin investing his specialty for years now and was the brains behind the very well-performing Vice Mutual Fund (MUTF:VICEX). With YOLO, Ahrens’ take is directly on the cannabis industry. Here, he uses a fundamental investment process in order to find cannabis-related companies across multiple industries or those firms that offer plenty of upside/growth.
What you get is a vastly different looking ETF than the index.
As for returns, it’s too early to tell. YOLO just launched this year and only a few months ago. That launch was right in the middle of the last market swoon. So, the marijuana ETF has underperformed the S&P 500 by a decent margin. However, longer term, YOLO could provide a great way to gain access to the sector and score some better-than-average results.
Expenses for YOLO run at just 0.74%.
AdvisorShares Vice ETF (ACT)
Perhaps you like the idea of owning some marijuana stocks, but don’t want too much risk. If so, Ahrens’ other managed ETF — the AdvisorShares Vice ETF (NYSEARCA:ACT) — could be for you.
ACT — like Ahrens’ previously managed VICEX — bets on all types of sin stocks. This includes alcohol, weapons, gambling, tobacco as well as cannabis. This broader portfolio of sin provides more diversification and less risk than simply owing marijuana stocks. After all, stocks like Boston Beer (NYSE:SAM) and Phillip Morris International (NYSE:PM) feature plenty of profits and billions in revenues. They are pretty risk-free at this point. They help balance out the pure cannabis exposure. Currently, pot only makes up about 26% of the fund.
But that percentage could be more than enough for some conservative-leaning investors who want to just dabble in the sector. The proof is in the pudding.
ACT is up 11.29% year-to-date. That’s about a percentage point higher than the S&P 500. Moreover, it’s better than many pure cannabis players. And certainly, it has been less volatile than them as well.
All in all, ACT makes a great sin play for more conservative investors. Expenses run at 0.75%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.