Marijuana ETF in Trouble—What Does It Mean for the Industry?

Marijuana ETFThe First Ever Marijuana ETF Plummets 

It’s been a wild ride in the marijuana industry over the past few months. Stocks have been crushed, only to rally a few days later, only to find themselves on the losing end again by the next week. It’s a roller-coaster ride, one that is not for the faint of heart, but it is also to be expected in an industry with so much hype surrounding it and so much money flowing in and out. All this makes the performance of the first ever marijuana ETF an even more complicated investment opportunity, or at least one that warrants a good deal of research.

The fact is that nearly everyone believes that there is money to be made in marijuana stocks. After all, this is a widely used substance that has a built-in market and is slowly but surely making its way towards legality in most major countries. Many of the companies on the stock market today that trade in marijuana products are already successful in the medical marijuana fields. As legalization for recreational use comes, they’ll almost certainly be able to expand those profits.

But the question is how much of the buzz surrounding the industry is pure hype and how much is fact-based, sound analysis. After all, we’ve spoken about the marijuana bubble before, and while it definitely does exist, it does not preclude marijuana stocks from being good long-term investments.

The numbers are still as impressive as ever, in any case. A recent report from Marijuana Business Daily shows that legal pot sales are expected to jump to a range of $5.1 billion to $6.1 billion in 2017, then climb an additional 45% in 2018, with sales expected to crest $17.0 billion by 2021. Some investment firms have blown these projections out of the water, believing that U.S. legal sales could soar as high as $50.0 billion by 2026. (Source: “Marijuana Business Factbook 2017,” Marijuana Business Daily, May 2017.)

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With all that potential cash floating about, it would make sense for a marijuana ETF to be a winner, or at least a pretty safe investment in the industry moving forward. So why has HORIZONS MARIJUANA LIFE SCIENCES IDX ETF (TSE:HMMJ) performed so poorly over recent months?

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The Ups and Downs of the Marijuana Industry 

HMMJ had a brief flirtation with success upon its release, but has been on a steady downward spiral since mid-April. The ETF, like any other industry, tracks marijuana stocks overall and, as such, fell in relation to the decline in share prices that many major marijuana companies experienced.

As seen in the chart below, the ETF predictably fell as marijuana stocks in general fell. This makes sense and is not a cause for alarm, should you be interested in taking advantage of the marijuana ETF.

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Chart courtesy of StockCharts.com

But this ultimately leads us to the question of whether the marijuana ETF will be worth it in the long run. While of course the investment will come with a fair bit of risk, that risk is inherent to the marijuana industry as a whole. But are you better served putting your money in an ETF versus an individual stock in the marijuana stock market?

The answer depends on what type of investor you are.

Should you wish to have a more stable and reliable investment with predictable returns but without massive fluctuations—both low and high—then an ETF may be your best bet. Essentially, if you’re the more cautious type of investor looking for a (more) secure ticker to put your money in, the marijuana ETF is more suited to your style.

Conversely, if you want to be able to reap the rewards of massive gains at the expense of having your investment be more vulnerable, then playing with individual tickers is the way to go.

At the moment, there are a lot of companies trying to make money off the marijuana hype, and we’re going to see a lot of pretenders crop up looking to make a quick buck. While some are certain to be profitable investments, others could be absolute duds. So invest with caution when it comes to marijuana companies.

Sticking to bigger names like Canopy Growth Corp (TSE:WEED) is a good choice for those looking to split the difference between ETF stability and individual risk/reward type investments.