HMMJ ETF: The Best Bet for Funds in the Marijuana Sector

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Horizons ETF Forecast

Read any modern guide-to-investing book and you’ll almost certainly run across a big fat section on exchange-traded funds (ETFs). The marijuana industry, being as young as it is, does not have many choices in the ETF field, but Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ) is the largest and a fast grower, with over CA$1.0 billion in managed assets. With the industry doing as well as it is, what does the Horizons ETF forecast look like?

In my mind, Horizons ETF is a solid long-term option for investors who want to reap the benefits of the marijuana industry but avoid the extreme volatility associated with certain stocks.

That is to say that the Horizons ETF offers exposure to the market but with less extreme swings compared to picking individual stocks.

While that applies near universally to all ETFs, it bears repeating in this case considering just how volatile the marijuana market has been in recent weeks.

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As such, the Horizons ETF is likely to see strong sustained growth for years to come, but likely lacking some of the massive swings that individual stocks will go through—both up and down.

Why HMMJ Soared

Over the past month, HMMJ has jumped by about 32% in keeping with the marijuana industry’s massive boon.

This makes sense. The Horizons ETF tracks some of the biggest names in the industry, which all received a healthy stock price bump in August. The boost was prompted, of course, by the massive Constellation Brands, Inc. (NYSE:STZ) $3.8-billion investment in Canopy Growth Corp (NYSE:CGC).

Chart courtesy of StockCharts.com

The move sparked a rush of interest in the marijuana stock market and sent many share prices flying.

HMMJ, as a result, also saw a strong increase in value.

It’s also worth noting the stocks that compose the fund:

Security Name Weight
Aurora Canabis Inc 12.45%
Canopy Growth Corp 11.98%
Aphria Inc 10.20%
GW Pharmaceuticals PLC 8.38%
Scotts Miracle-Gro Co 7.11%
Tilray Inc 7.11%
Cronos Group Inc 5.86%
Green Organic Dutchman Holdings Ltd 4.24%
Hexo Corp
3.94%
CannTrust Holdings Inc 2.95%

(Source: “Top Holdings,” Horizons Marijuana Life Sciences Index ETF, last accessed September 26, 2018.)

As you can see, the fund’s heaviest investments are in the largest, most stable stocks in the industry.

Canopy Growth and Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB) are among my favorite long-term picks in the marijuana industry. The fund is focused on being a long-term play, in keeping with other ETFs.

As such, it makes sense that it would keep its highest holdings in the most stable companies in the industry.

Other companies in the HMMJ fund include the much more volatile picks like Tilray Inc (NASDAQ:TLRY) and Cronos Group Inc (NASDAQ:CRON).

These two companies are among the most unpredictable and swing-prone stocks in the industry at the moment.

While CRON stock has always been a bit uneven in its performance, that pales in comparison to Tilray stock’s massive spikes and dips that have characterized its short time on the stock market.

These more volatile plays make up a smaller but still significant part of the Horizons ETF, granting it exposure to these high-flying picks without betting the farm on companies that have yet to show sustained, long-term gains.

Other familiar names in the fund include GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) and Hexo Corp (OTCMKTS:HYYDF, TSE:HEXO).

I focus on these two specifically because I believe that, ideally, the fund would increase its stake in HECO stock and decrease it in GWPH stock.

GW Pharmaceuticals is a solid company but one that has shown an inability to make the strong gains that other marijuana stocks have yielded. This is primarily due to the fact that GW operates in the pharma space and therefore has to go through the many roadblocks facing that sector like long, drawn-out testing processes and regulatory obstacles.

On the flip side, HEXO stock is one of the strongest pot stocks on the market at the moment, with a huge upside in the short term and a good outlook in the long term as well. That makes it an ideal addition to this ETF and one that should have more weight.

Is HMMJ in a Bubble?

The final aspect of HMMJ that we’ll examine is whether the fund is in a bubble.

That entirely depends on whether you believe that the marijuana industry as a whole is in a bubble.

If you believe that it is, then it only stands to reason that the Horizons ETF is in a similar situation. After all, ETFs track broader industry trends and movement, so if a bubble does indeed loom in the pot sector’s future, then the Horizons ETF is going to be in a lot of trouble.

The good thing is that I don’t believe that we’re in a bubble. While there will be significant and prolonged downturns at times (as we experienced in the first half of 2018), ultimately, we still have a lot of growing room left in the marijuana industry.

As such, we’re likely to see prolonged growth for years to come as pot goes global, expanding into a number of new markets across the world.

So while there will be tough times for HMMJ, its diversified portfolio makes it an ideal long-term pick.

Analyst Take

Exchange-traded funds are so celebrated because they are a safe, strong pick for everyday investors. HMMJ is no different.

I like its picks. While I would change a few of the numbers around personally, the Horizons ETF is in a strong position to yield growth for investors for many years to come.