Investors rush to bring weed to the masses

TODAY EUROPE’S first cannabis exchange-traded fund (ETF), the Medical Cannabis and Wellness ETF, dubbed CBSX, launches in Germany. A joint project of Purpose Investments, a Canadian asset manager, and HANetf, a British ETF platform, the fund will invest in listed businesses that grow, make and distribute medical cannabis products. One of the goals of the new venture is to democratise cannabis investments, which have historically been inaccessible (because companies are still private) or expensive (because investors must buy stocks individually). The rise of ETFs—pooled portfolios designed to replicate the performance of an asset class—has made investing in weed cheap and easy. CBSX will be available to investors in Britain, Italy and Ireland.

Marijuana ETFs have proved popular in America. In 2019 investors poured $729m into US-listed funds (and have added another $20m since the start of 2020). According to Jefferies, a stockbroking firm, the legal cannabis market was worth $11bn globally in 2018, and will grow to at least $50bn by 2029. The enthusiasm is in part a consequence of a global trend towards legalisation: medical cannabis products are now legal in more than 40 countries; a handful of countries have also legalised recreational use of the drug. In Britain, where medicinal cannabis is legal but hard to get, such treatments are gaining wider acceptance. In November two cannabis-based medicines were approved for use by the National Health Service (NHS) in England. In June the Church of England dropped medicinal marijuana from its list of excluded investments.

And yet anyone betting on cannabis ETFs last year would have seen their money go up in smoke. The world’s largest fund, the US-listed ETFMG’s Alternative Harvest ETF, has lost over half its value since its peak in March 2019. Horizons Marijuana Life Sciences ETF, which is listed on the Toronto Stock Exchange, has fallen by nearly two-thirds (see chart). Investors were giddy when Canada, home to many of the world’s biggest cannabis businesses, legalised recreational pot in October 2018. Valuations promptly soared. But some Canadian provinces were slow to approve the opening of shops, which constrained sales. Companies expanded without adequate financing (banks are still staying clear of the sector). A health crisis in America involving vaping products containing tetrahydrocannabinol (THC), the psychoactive ingredient in cannabis, rounded out a terrible year for the industry.

Still, ETF investors have reasons to hope in dope. Bloomberg reckons that sales in Canada could surge by 35% in 2020, as more shops open and “derivative” products, such as cookies and drinks, hit the shelves. In America, where cannabis is banned at the federal level, at least a half a dozen states will hold referendums on legalising marijuana (adding to the 33 that already allow its medical use). Voters seem overwhelmingly favourable. Congress may soon pass a bill that would allow banks to offer services to cannabis firms in states where it is legal.

Optimism will bring yet more ETFs to market. Yet history has shown that, when niche sectors such as robotics or videogames grow popular enough for their own ETFs, it is the first few that grab the lion’s share of investors’ money. So for the newcomers, pot luck may prove elusive.