Horizons (HMMJ) ETF: World’s First Marijuana ETF Is Worth a Second Look

Marijuana-StocksMarijuana ETF: A Game Changer for Investors?

Viva la revolución! That’s the slogan jubilant potheads are raising in Canada, as the country is officially going to become the second in the world to legalize recreational marijuana. By July of next year, weed lovers in Canada will freely puff joints. But they are not alone in the celebration. There are thousands of those who invested in marijuana stocks and are now watching their investments multiply. But if you missed the boat earlier, fate is once again knocking at your doors, because we have just been given the first ever marijuana ETF!

Potential investors in the U.S. and Canada have been anxiously waiting to see which way the winds blow for weed legalization before getting into the pot craze. Now that Canada has given it a green signal and many U.S. states are likewise considering legalization, many of us feel ready to set sail. The only problem that remains is to figure out the directions to the right marijuana stocks to watch right now.

The truth is that I, like many of you, am fascinated with this investment idea that’s creating overnight fortunes. But I, like many of you, am also in two minds as to whether marijuana stocks are worth the risk.

Prices have tripled and even quadrupled for marijuana stocks, and it’s natural for us to feel jumpy. Frankly, nobody likes to overpay. But for those of us who feel we’re late to the party, this new opportunity could be a game changer for our portfolios.

America’s northern neighbor is home to some of world’s best cannabis strains, world’s biggest listed marijuana companies, world renowned pot activists and, now, the first-of-its-kind ETF solely dedicated to marijuana investors.

One of Canada’s biggest investment funds—Horizons ETFs—has launched a new marijuana ETF this month—HORIZONS MEDICAL MARIJUANA LIFE SCI ETF (TSE:HMMJ) that made its market debut on the Toronto Stock Exchange on April 5, 2017 for a price of $10.00. (Source: “World’s First Marijuana ETF Launched”, Horizons ETFs, April 5, 2017.)

Investors now face one question.

Should You Buy Horizons’ HMMJ Marijuana ETF?

It’s okay if you’re new to investing and wondering; “What the heck is an ETF?” Let me make it easy for you. An Exchange-Traded Fund (ETF) is the fraternal twin of a mutual fund. It is similar in essence but different on the face of it.

Like a mutual fund, an ETF pools together different investments into a single fund. So an investor who doesn’t have the time or knowledge of analyzing individual investments can simply buy a fund and forget.

Simply put; an investor with absolutely no clue what marijuana stocks to watch right now could just invest in a marijuana ETF like HMMJ that constitutes 15 of the top marijuana stocks in North America (both the U.S. and Canada).

This way, they’d gain an indirect exposure to all the top marijuana plays without directly investing in any single marijuana stock, thus mitigating undue exposure to risk.

But note that unlike a mutual fund, where a fund manager takes care of your money by buying and selling investments for you, an ETF simply tracks an index. In other words; your return depends on the total return of the stocks constituting the ETF.

The HMMJ ETF tracks the North American Medical Marijuana Index, which includes 16 top medical marijuana companies in the U.S. and Canada. Now Horizons’ Marijuana ETF constitutes most of these stocks, but not all of them. So, it aims to replicate the performance of the index, plus earn an alpha. In layman’s lingo, alpha is the extra return over the index return.

You may now be wondering why someone would consider buying a passive ETF when they could have a mutual fund manager actively trading for them instead. For lower fees, duh! Mutual fund fees charge much higher fees, usually in excess of two percent of invested funds.

Contrast this with HMMJ’s fees of 0.75%. This means that if you’re investing $1000 in the HMMJ ETF, you’ll be paying a minuscule $7.50 in fees to the fund. Not a bad bargain!

It’s obvious that ETFs come with certain benefits over mutual funds. Not only do they charge less in fees, they also save on taxes. That’s because securities in the fund are not actively bought and sold.

Plus, an even bigger upside is that a person can buy and redeem their funds anytime on the exchange. So their investment in an ETF is relatively liquid. On the contrary, a mutual fund manager requires time to unlock funds, so the investment is less liquid in a mutual fund.

If these benefits pique your interest, then the HMMJ ETF could be your best bet in the booming marijuana industry.

Here is the list of all the companies included in the ETF. 

Company Weight Exchange Company Weight Exchange
Aurora Cannabis Inc
10.26% Canada
Insys Therapeutics Inc
9.81% U.S.A.
Zynerba Pharmaceuticals Inc (NASDAQ:ZYNE) 9.35% U.S.A.
Aphria Inc
9.33% Canada
Canopy Growth Corp (TSE:WEED) 9.07% Canada Scotts Miracle-Gro Co (NYSE:SMG) 8.9% U.S.A.
GW Pharmaceuticals PLC- ADR (NASDAQ:GWPH) 8.66% U.S.A. Cronos Group Inc (CVE:MJN) 7.98% Canada
Organigram Holdings Inc (CVE:OGI) 5.75% Canada CanniMed Therapeutics Inc (TSE:CMED) 5.33% Canada
Supreme Pharmaceuticals Inc (CNSX:SL) 4.52% Canada Emblem Corp (CVE:EMC) 4.44% Canada
ICC International Cannabis Corp (CVE:ICC) 2.87% Canada Emerald Health Therapeutics Inc (CVE:EMH) 2.72% Canada
Hydropothecary Corp (CVE:THCX) 0.76% Canada Cash 0.24%

Is Marijuana ETF Safe?

It’s evident that all the major marijuana plays have been duly given weight in the ETF, albeit many of them are penny stocks. Also note that there are quite a few U.S.-based marijuana companies, yet Canadian marijuana stocks dominate the ETF. The two factors may add to the risk of the ETF.

Now, no investment is ever 100% safe. So this marijuana ETF is no exception. But roughly speaking, an ETF diversifies your risk across various securities instead of exposing you to one or more individual securities.

On the same lines, it makes sense for a marijuana ETF to be a safer play compared to most marijuana stocks in this exceedingly speculative industry.

Take note, however, that a U.S. investor buying into this Canadian ETF will have to deal with higher brokerage fees, tax concerns, and greater exposure to the Canadian markets. Although the extra hassle might deter many U.S. investors, others may not mind investing in this marijuana ETF.

But here’s some basic investing wisdom. It’s often better to buy it when it is trading at a discount and not a premium. Discount simply means that the price of the ETF is less than its Net Asset Value (NAV). Such discount windows open momentarily. So if you have made up your mind to invest and find a discount window, then make a swift move.

By the way, in case you’re wondering, NAV is the sum of assets minus liabilities of all the stocks in the ETF, divided by the total outstanding shares of the ETF. Find it confusing? That’s okay. All you have to ensure is that you’re not paying for the ETF stock more than its NAV.

The NAV for HMMJ ETF is calculated daily at the end of the day and you can find it at the investment fund’s website. (Source: “Horizons Medical Marijuana Life Sciences ETF,” Horizons ETF, last accessed on April 18, 2017.)

For comparison, here’s what the price chart looks like right now. The price went for a correction after an initial pop—a typical trend seen in most stock IPOs.

HMMJ stock chart

Chart courtesy of StockCharts.com

Bottom Line on HMMJ Marijuana ETF

The legal medical marijuana industry is already a multi-billion-dollar industry that generated over $6.0 billion last year in North America alone. The impending legalization in Canada and many states in the U.S. will likely kill marijuana’s illegal black market. In turn, that money will also start flowing to the legal marijuana companies.

One can safely predict that once they get the green signal, Big Pharma and Big Tobacco will also jump in. In short this industry is going to see massive growth in the coming years.

But if you’re unsure which weed stocks are the best bets right now, then you could take a calculated risk with a marijuana ETF. And for now, Horizons’ HMMJ ETF is the only available choice.