Cannabis ETFs

When California became the first US state to legalize medical cannabis in 1996, very few people expected that cannabis would go on to become one of the most valuable plants in the world.

But sixteen years later when Colorado became the first US state to legalize recreational cannabis in 2012, analysts and experts saw the cannabis industry as a profitable sector for investment.

Today, more than eighteen US states have legalized cannabis for recreational use, and thirty-seven states have regulated the use of cannabis for medicinal purposes.

In 2021, Americans spent around $25 billion on cannabis products, and the industry has created over 428,000 jobs since 2017.

Prohibition Partners reported that combined global sales of CBD, medical, and adult-use cannabis topped $37.4 billion in 2021 and could rise as high as $102 billion by 2026.

With such figures, the industry is attracting many investors. However, it is crucial to highlight that recreational cannabis is still illegal at the federal level. This aspect is essential to consider, as it can make the market highly volatile. In fact, regulation is a central issue for investing in cannabis. Banks are reluctant to support ETFs and are often not willing to take this risk, given the regulatory uncertainties.

The cannabis industry in the US operates in a gray area. While it may be very profitable and is certainly growing fast, political or legal action against a big cannabis company or the industry could quickly shut down all cannabis-related businesses.

In addition, many cannabis businesses struggle with the banking system. As cannabis is illegal at the federal level, many cannabis operators operate in an all-cash industry. This poses additional risks and challenges to investing in the industry that several analysts consider risky.

Those interested in investing in the cannabis industry have several options on the table, including stocks and exchange-traded funds (ETFs).

Investing in cannabis stock is the same as any other industry. Cannabis stocks are traded on US stock exchanges, and you can buy and sell them through any major brokerage firm.

But rather than investing in individual stocks, investors can also add a cannabis ETF to their portfolios.

An ETF is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs track a particular index, sector, commodity, or other assets. Imagine a basket of stocks that trades on an exchange, just like stocks do singularly.

ETFs are similar to mutual funds. However, while investors can buy mutual funds at the end of each trading day based on a calculated net asset value, ETFs can be traded intraday like stocks.

Although ETFs may seem like an easy investment choice, they are not risk-free.

The cannabis industry is an emerging market and may face high volatility and, thus, the potential to fail. In 2019, the top six publicly traded cannabis companies lost a combined $25 billion in market value. Such volatility naturally affected the ETF's performance.

Unlike stocks, cannabis ETFs offer a more diversified portfolio. They track a basket of different stocks related to the legal cannabis industry.

Diversification is the most significant benefit of a cannabis ETF. While investing in a single cannabis stock requires an in-depth knowledge of the company you want to invest in, when you buy shares of an ETF, you own a stake in multiple cannabis companies with a single purchase. Suppose one of the basket's stocks goes down in price; in this scenario, such a downturn won't necessarily spoil your entire investment.

Cannabis ETFs may include both plant-touching and non-plant-touching companies. Some ETFs are exclusively focused on the medical cannabis industry, while others focus on the broader cannabis space, including the hemp and CBD sector. Most companies participating in ETFs operate in the US and Canada, although a portion of portfolios may be based in Ireland or Israel, where the cannabis industry is also rapidly growing.

While some ETFs follow a blended strategy, investing in a mix of growth and value stocks of mid-cap and small-cap companies, others seek a long-term capital strategy investing in domestic and foreign cannabis equities.

Although some financial analysts say investing in cannabis right now may be too early or risky, others argue it could be an excellent opportunity to enter the market, as it may grow exponentially once the US legalizes recreational cannabis at the federal level.