After a brisk July that saw three cannabis exchange traded funds (ETFs) come to market, issuers took a marijuana ETF break in August, but at least one is back at it. The Global X Cannabis ETF (NASDAQ:POTX) debuted on Thursday, Sept. 19, becoming the sixth marijuana ETF listed in the U.S.
For investors keeping score at home, with the addition of the index-based POTX (it tracks the Cannabis Index), there are now three passive marijuana ETFs in the U.S. and three actively managed products.
It remains to be seen which structure, active or passive, is most beneficial for investors. Excluding POTX simply because it’s just a few days old, all of the marijuana ETFs that debuted this year along with the category’s oldest member, ETFMG Alternative Harvest ETF (NYSEARCA:MJ), have been drubbed in 2019 as prices but not valuations have come down on a slew of previously beloved marijuana stocks.
Just this month, both MJ and the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO), the first active marijuana ETF, are each down more than 8.60%, indicating the jury’s still out on whether active or passive is the way to go.
Getting back to POTX, the newest marijuana ETF enters a crowded field at a time of vast challenges for cannabis stocks. To be sure, those are considerations, but not detractors to the rookie fund’s investment thesis and potential.
A Pulse on POTX
The POTX structure is similar to some rivals in the marijuana ETF camp with the new Global X fund allocating over 80% of its weight to Canadian companies. That’s the lay of land for passive marijuana ETFs, which usually feature light or no exposure to U.S. cannabis companies because those firms don’t trade on major domestic exchanges.
As has been widely noted, Canadian cannabis exposure is a double-edged sword with plenty of pros and cons investors need to acknowledge.
“In October 2018, Canada achieved a milestone as the first G-7 country to fully legalize adult use of recreational cannabis…Since then, cannabis consumption has been on the rise, with 17.5% of Canadians reporting use, up from 14% a year ago, prior to legalization. In addition, sales of various medical and non-medical forms of cannabis increased 53% in the aggregate less than a year since recreational use was first allowed.”
Top 10 holdings in POTX include familiar names, such as Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC) and HEXO Corp (NYSE:HEXO). Those companies and others currently have limited exposure to the U.S., which Global X acknowledges in its research. That’s also a trait that needs to change to bolster the case for POTX and every other marijuana ETF over the long-term.
Also from Global X:
“Currently, Canadian LPs may only enter the US by selling hemp or CBD products, which were legalized for cultivation and sale on December 12th with the 2018 Farm Bill…LPs have also acquired rights to control US companies once cannabis is legalized at a federal level. For example, Canopy Growth, which operates in the recreational cannabis market in Canada and in other legal medical markets around the world, announced on April 19th that it reserves the right to acquire the US based company, Acreage Holdings, for $3.4 billion, once cannabis is legalized at a federal level in the US.”
Bottom Line: Other Perks
POTX has some other perks, including some that are reflective of the broader cannabis industry. For instance, global marijuana revenue is expected to be about $15 billion this year, but the total addressable market is more than 12 times larger than that.
Additionally, other countries are looking to fully legalize cannabis, Mexico and New Zealand among them, and that could be a slight catalyst for marijuana ETFs, but not a panacea without the U.S. following suit.
Another benefit specific to POTX is its fee. The new marijuana ETF charges just 0.50% per year, or $50 on a $10,000 investment, making it the second-cheapest marijuana ETF on the market today and the least expensive among the passive products in this space. Time will tell if that’s enough to get investors in the door.
Todd Shriber does not own any of the aforementioned securities.