Shares of the Alternative Harvest ETF (NYSEARCA:MJ) are showing a little life after a long period of stagnation. The marijuana-based exchange-traded fund has added on nearly 10% over the past few trading sessions.
Shares have certainly been a huge underperformer so far in 2020, dropping nearly 35% year to date. This is despite the fact that the marijuana industry continues to expand at a rapid pace. But I still think you can consider it among the best ETFs. It might not be a winner of our contest this year, but you should still look for the MJ ETF to close out the year with a buzz-worthy rally.
MJ actually had a great start to 2020. Shares were up over 10% in the first two weeks of trading and briefly traded over $19. The MJ ETF was then met with unrelenting selling and traded down to under $9 thanks to damage caused by the novel coronavirus pandemic.
It has recovered somewhat since then, but not nearly at the same pace as the overall market or the other ETFs in InvestorPlace.com’s best ETFs contest.
Much of the underperformance is due to oversupply. It seems as though everyone and their grandmother is now in the cannabis business. CBD oil is seemingly sold at virtually every convenience store and gas station across America. Most is produced by local operations that have sprung up like weeds. It seems the barrier to entry is minimal at best — a huge negative for the big operators.
Even though more states have now legalized recreational use to broaden demand, the dramatic increase in supply has far out-weighed these benefits. Currently 11 states have made marijuana legal for recreational use. Four more states have it on the ballot for November. There is even talk of legalization on a federal level.
Pabst just introduced a cannabis infused seltzer drink. Canopy Growth (NYSE:CGC), the third-largest component of MJ, plans on introducing THC-infused drinks this coming summer. The ever expanding demand for these higher end, more difficult to manufacture and market products are the key to lift the MJ ETF out of the doldrums.
While the fundamentals may be lackluster at best, all is not lost for MJ. The technical backdrop is finally beginning to show some improvement.
Shares twice held the crucial $10 support level and have since turned higher. The 9-day RSI reached oversold levels not seen since the March lows before turning sharply higher as well. The MACD just generated a fresh new buy signal. MJ also broke back above the 20-day moving average, which should now provide support. A move back to challenge the recent highs near $13 seems to be a distinct possibility.
Is MJ Still One of the Best ETFs?
Source: The thinkorswim® platform from TD Ameritrade.
The price performance has been underwhelming at best for MJ so far in 2020. The dividend yield, however, is starting to look attractive. Currently, MJ has a very healthy dividend yield of 8.5%. It has paid out 56 cents in dividends so far in 2020, making some of the underperformance more palatable.
Interestingly enough, much of this payout is based on lending out shares to be shorted. This short stock rebate may account for some of the overhang in the ETF.
The heavy shorting of the MJ ETF may also be a catalyst to propel it higher if the shorts are forced to cover. Currently, short volume in MJ is at the highest levels in the past few weeks. The short volume ratio is now over 30 and any meaningful rally in MJ could get the shorts nervous, propelling shares higher. Plus the more shorts, the more short stock rebates and the higher the dividend payout for MJ owners.
The MJ ETF has undoubtedly been a major laggard so far this year. But while it wasn’t one of the best ETFs this year, that doesn’t mean you should count it out completly. Investors looking for a solid dividend income along with some potential upside may want to consider adding it to their portfolio on any further weakness. They will certainly get in at a better price than I did at the beginning of the year.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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