Wondering how to play the marijuana sector? Try an ETF, says National Bank Financial’s Daniel Strauss, who cautions that having exposure to pot’s volatility is one thing — just don’t bet the farm on it.
Call it Act Three for cannabis. With a new year come new speculations about how Canada’s pot stocks will fare over upcoming months. It’s no longer the pre-legalization fever that gripped the investment world in 2018 where companies like Canopy Growth and Aphria literally became household names as retail investment in the space grew to outsized proportions.
But nor are we dealing with last year’s debacle, the veritable day-after comedown and growing pains associated with a still-emerging industry. Disappointing sales, ballooning expenses and genuine concern over whether this or that company actually has the right stuff to someday turn a profit.
SEED or HMMJ?
And while those worries still linger, there is a definite sense that cannabis has taken its lumps and could — that all-important word — possibly pull itself off the mat and start punching. Valuations have certainly fallen to more reasonable levels as have expectations on both the eventual sizes of the rec markets across Canada and the US and the number of years it will take to truly snuff out the black market.
One thing has become clear, however. Picking out the winners in cannabis is no easy matter, leaving the fund-based approach an attractive option for those of us still itching to put some money on pot stocks.
For Strauss, head of ETF Research and Strategy at National Bank, while there are definite advantages to ETFs for cannabis, the choice between active and passive funds might be a difference-maker. And so, you may want to start thinking about the Horizons Marijuana ETF versus the Evolve Marijuana ETF.
“This is a very interesting market. It’s pretty much a growth industry,” says Strauss, speaking to BNN Bloomberg on Wednesday. “HMMJ was a very successful product for Horizons and it attracted hundreds of millions of dollars per month within a year of its launch.”
“It’s an extremely volatile space. If you were to put up the price chart for either HMMJ or SEED you’ll see very wild swings,” he says. “We really try to tell clients that this is an extremely risky, speculative industry and shouldn’t be used as a nest egg, far from it.”
While Horizons’ marijuana fund attempts to track the index of cannabis companies as a whole, and is thus a passive investment strategy, Evolve’s marijuana ETF uses active fund management, which can have the advantage during volatile periods of being able to keep some of its assets in cash, a trait not available to passive funds like HMMJ.
“We like passive because it’s very low in cost and tends to be a bit more liquid but for markets like this there is a strong case to be made for active,” Strauss said. “The active ETFs have the ability to hold a little bit of cash at times, and when this market is selling off, you want to be able to pull back investment a little bit whereas the indexed fund has no choice but to be fully invested at all times.”
“For a very fast moving, very complicated market like this it could make sense to outsource some of the portfolio management decisions to a talented trader and manager who can avoid some of those very fast moving markets with temporary cash positions,” Strauss said.
Strauss gives the nod to SEED along with the NEO Exchange marijuana ETF from Purpose, the Purpose Marijuana Opportunities Fund (NEO:MMJ).
“We do like HMMJ for the exposure and it’s kind of become the trading vehicle for this asset class, so for quick, rapid moves HMMJ is still perfectly fine,” he added.