By Kip Meadows, Founder and CEO of Nottingham.
The launch of four new cannabis ETFs in 2019, paired with the recent filing for yet another one, has many investors wondering how to navigate amongst the options as they seek exposure to the growing cannabis industry. There are significant differences among the current options, or at least enough differentiation to provide some decision points.
The oldest and still largest cannabis ETF on the market is the ETFMG Alternative Harvest ETF (NYSE: MJ). MJ got a jump-start by amending a South American real estate ETF into a cannabis ETF. This unorthodox change caught both the SEC and the ETF’s custodian by surprise, with the custodian resigning during the first few months of operations.
The MJ investment objective is quite broad, and an examination of the portfolio indicates more than 17% is allocated to tobacco stocks, with other sizable positions including fertilizer companies, breweries and real estate investment trusts (REITs). It is difficult to envision how the cannabis industry will move the stock price needle on any tobacco company, fertilizer company or international brewing holding company for the next decade at least. Perhaps there will occur a time when cigarette rolling equipment and distribution networks will be useful to the cannabis industry, but not any time soon. The same goes for agricultural fertilizer companies, which likely derive much less than 1% of their revenues from providing fertilizer to cannabis growers.
The trading spread on MJ has recently averaged 0.24%, while the ETF has an expense ratio of 0.75%.
The other four cannabis ETFs can be differentiated first by those that are actively managed and those that are index ETFs. Like MJ, the Cambria Cannabis ETF (BATS: TOKE) and the Cannabis ETF (NYSE: THCX) are index ETFs, while the AdvisorShares Pure Cannabis ETF (NYSE: