This Segment of Marijuana Market Could Be Best Way to Profit From Pot Stocks

This Segment of Cannabis Sector Could Be Best Way to Gain From Pot Stocks
iStock.com/Nikolay Ponomarenko

Marijuana ETFs

As the marijuana industry continues to mature, it’s going to offer investors myriad ways to profit. From smaller startups to marijuana initial public offerings (IPOs), to medical and recreational pot, there are a lot of options out there for marijuana investors. One investment option that has been gaining traction is marijuana exchange-traded funds (ETFs).

ETFs are a very common investment option across the stock market, present in nearly every industry.

There are only a handful of marijuana ETFs right now, but that’s changing.  As these ETFs continue to proliferate, we’re going to see options grow for investors.

An ETF is, at its core, a bundle of commodities, assets, or stocks (usually stocks) traded together in order to mitigate risk and take on the heavy lifting.

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Instead of having to track several companies and their quarterly reports, news releases, management changes, etc., investors can invest in an ETF that will state plainly its methodology and what it hopes to accomplish with its specific group of companies.

The Global X Cannabis ETF (NASDAQ:POTX) is the 7th marijuana ETF to hit the market. This ETF tracks companies that derive at least half of their revenue, operating income, or assets from the cannabis industry. (Source: “Global X Launches Cannabis ETF (POTX) To Provide Focused Access to a Burgeoning Theme,” Cision PR Newswire, September 19, 2019.)

The fund tracks a variety of areas within the marijuana industry, including growth, production, distribution, and pharmaceutical companies. It also includes hemp and cannabidiol (CBD) companies.

The largest marijuana ETF is Horizons Medical Marijuana Life Sciences ETF (OTCMKTS:HMLSF, TSE:HMMJ).

Chart courtesy of StockCharts.com

Horizons Medical Marijuana Life Sciences ETF, which has about CA$650.0 million in managed assets, primarily tracks the heavy hitters in the cannabis industry.

As you can see in the above chart, HMMJ pretty much directly tracks the course of the overall marijuana stock market: 2019 was fantastic to start, then it began to slide in the second half.

And that’s the thing about marijuana ETFs (or ETFs in general): because you’re getting a broader exposure to the market, you’re basically investing in the market in general.

Obviously, certain stocks will rise while others fall, but in general, what’s good for one marijuana stock is usually good for all them. As such, ETFs provide an excellent way to invest in an entire market if one believes that the particular market is on the rise.

When it comes to marijuana stocks, that is very much the consensus. Setbacks or no, the marijuana industry is only going to grow as newer legal markets, like those in Europe and the U.S., become accessible. And when they do, marijuana stocks will skyrocket.

As such, jumping into a marijuana ETF in anticipation of those gains might not be a bad idea, especially considering their reduced prices right now due to the marijuana stock correction we experienced over the summer.

Analyst Take

The legal marijuana industry is continuing to grow and offer investors new opportunities to gain exposure to pot stocks.

Marijuana ETFs represent one of the safer, more long-term-oriented ways for investors to profit from the massive growth slated to take place in the pot market.