Marijuana ETFs: On a Roll or Up in Smoke?

Marijuana exchange-traded funds give you the chance to invest in a range of cannabis-related companies. But don’t expect stability from these budding funds.

Chris DavisSeptember 15, 2020

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Pot stocks get all the attention, but marijuana exchange-traded funds may be a better alternative. Marijuana ETFs let you invest in companies that operate in every vertical of the marijuana industry, from product conception to consumption.

For example, the ETFMG Alternative Harvest ETF (by far the largest cannabis ETF in terms of assets under management) invests in companies from across the entire marijuana industry, including:

  • GW Pharmaceuticals (cannabinoid-focused medicine).

  • Cronos Group (production and distribution).

  • Canopy Growth Corporation (research and product development).

  • Aurora Cannabis (product development and production).

Investing in marijuana ETFs spreads your risk across multiple companies and segments of the industry, rather than concentrating it in any single stock. This strategy, known as diversification, is a proven method in any kind of investing, but it’s especially important in a sector as new and volatile as the cannabis industry.

The best marijuana ETFs today

Below are the five best-performing cannabis ETFs available to U.S. investors (excluding the over-the-counter market), based on year-to-date returns. It’s important to remember that past performance doesn’t guarantee future results, but looking at a fund’s recent price movements often provides a good place to start your search. For a deeper dive, look into the fund's one-year or five-year returns to see how it's performed over longer periods.

YTD returns are based on current price. Data is pulled from Google Finance and may be delayed up to 20 minutes. Information is solely for informational purposes and not for trading purposes or advice.

Marijuana ETFs vs. stocks

There are hundreds of cannabis stocks to choose from, many of them risky penny stocks or stocks of companies with extremely small market capitalizations. Given the industry’s young age, there’s ample room for shakeout that could significantly affect a stock’s price. There will likely be many losers, and it’s hard to predict the number of potential winners. The current state of the industry makes an already risky strategy — picking individual stocks — even riskier.

Marijuana ETFs still come with considerable risk, but you’ll at least broaden your exposure to dozens of companies. If one company in the fund fails, ideally those losses will be offset by another company’s success. It’s true that you could miss out on the sky-high returns of an individual breakout stock, but investing in cannabis ETFs could help you avoid the significant losses investors are likely to see in such an unproven industry.

To purchase shares in a marijuana ETF, you’ll need a brokerage account. Below are a few strong brokerage options for buying an ETF:

FIDELITY

5.0

NerdWallet rating 

Fees and minimums:

$0 trade fees. $0 annual or inactivity fees.

No account minimum.

Promotion:

None.

VANGUARD PERSONAL ADVISOR SERVICES

4.5

NerdWallet rating 

Fees and minimums:

0.30% per year.

$50,000 account minimum.

Promotion:

None.

ELLEVEST

5.0

NerdWallet rating 

Fees and minimums:

$1 - $9 per month.

No account minimum.

Promotion:

Two months free with promo code "nerdwallet"

The risks of marijuana ETFs

Investing in cannabis — including cannabis ETFs — comes with considerable risk. Regulatory uncertainty, financing hurdles and sheer unpredictability in business models and operations could significantly and quickly alter the future landscape, and in turn, the value of marijuana stocks and ETFs.

Regulation

While recreational marijuana consumption and possession is now legal in several states (and medical marijuana is legal in even more), in the eyes of the federal government, it’s still a Schedule 1 drug. This designation, which puts marijuana in the same category as heroin, ecstasy and LSD, suggests it has no medical value and a high rate of abuse.

This classification can lead to gray areas between state and federal laws. For example, the U.S. attorney general has the power to decide whether the Justice Department will enforce federal marijuana laws within states that have passed legalization laws, and this stance has already shifted from one presidential administration to the next. As long as enforcement is fluid, uncertainty will persist.

Financing and banking

While the earliest dispensaries and marijuana businesses may have struggled to find traditional financing and banking services, that isn’t as big of a concern today, and more change could be on the horizon.

In 2019, the Secure and Fair Enforcement Banking Act of 2019 passed in the House. If it becomes law, it would help protect depository institutions that supply financial services to marijuana companies. Moreover, the National Credit Union Administration issued interim guidance in 2019 to help credit unions navigate how to provide services to legal hemp businesses. This guidance was in response to the 2018 Farm Bill, which delisted hemp (which, in this context, means a marijuana plant containing less than 0.3% of the psychoactive ingredient THC) as a controlled substance at the federal level.

On top of all that, the number of depository institutions that provide banking services to marijuana companies has risen steadily since 2014, reaching 553 banks and 162 credit unions by the third quarter of 2019, up from about 100 banks and a handful of credit unions five years earlier.

Still, many of these developments aren't yet concrete. While they suggest legislation favorable to the marijuana industry could be forthcoming, the landscape is still being formed, which will likely result in continued uncertainty in the short term.

Volatility

Since its 2015 inception, the U.S. Marijuana Index — which tracks the leading cannabis stocks in the country — has enjoyed both high times and harsh comedowns. As of July 7, the index’s 52-week high is 105.19; the 52-week low is 19.91.

If you’re a new investor or are looking for predictability, there are other index funds and ETFs better suited for you. But if you’re willing to stomach the volatility of an uncertain market in exchange for getting in at an extremely early stage — and your portfolio is in a well-diversified, healthy state — you may have a case for investing in cannabis ETFs.

Learn more about sector ETFs:

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