Horizons Marijuana Life Sciences Index ETF: Why HMLSF Is Best Marijuana ETF So Far


What Makes the Horizons Marijuana Life Sciences Index ETF Special

Exchange-traded funds (ETFs) are often touted as some of the better investments for small buyers. The data often bears this out, with many ETFs consistently outperforming actively managed portfolios across a wide spectrum of industries.

It’s no wonder, then, that marijuana ETFs are generating a lot of interest. Several new additions have come into what was previously a rather thin field occupied by only one ETF: Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ). This was the first Canadian marijuana-focused ETF, and it has had a rip-roaring run so far.

In the last six months, we’ve seen the ETF jump by over 109% in gains. That includes a pretty disastrous February that brought down virtually the entire marijuana market, positioning the HMLSF ETF as one of the stronger performers over that time.

Of course, nearly all the big players in the marijuana market jumped by triple digits in that time, but it’s it’s equally important to note that many of them fell by 20% or even 30% since the beginning of 2018, while HMLSF only dropped by a few points.

That’s what you get with an ETF, after all: less volatility and more stability. Sure, the highs won’t be as high, but the lows also won’t totally wipe out your portfolio.

Aphria Inc (OTCMKTS:APHQF, TSE:APH) is a perfect example of why many investors prefer ETFs like the Horizons Marijuana Life Sciences Index ETF over specific stock picks.

APH stock gained about 122% versus HMLSF’s 110% over the past six months, but, since the beginning of 2018, APH has plummeted by 26% versus Horizon’s three percent.

HMMJ stock chart

Chart courtesy of StockCharts.com

ETFs are generally more stable and less prone to massive swings due to their focus on the market as a whole, rather than a single company. After all, the APH stock woes in February are due to a variety of factors, but chief among them was the company’s move to divest from U.S. cannabis companies due to new regulations from the Toronto Stock Exchange.

A company’s fortunes can be won or lost in a single day. An entire industry, however, is unlikely to collapse overnight.

About 10% of the HMLSF ETF’s holdings are made up of APH stock, but the holdings also include better performers like Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB), which comprises about 14.7% of the fund. Right now, Aurora is on top, but should that pendulum swing and send ACB stock plummeting while elevating Aphria, the Horizons Marijuana Life Sciences Index ETF will be able to weather the storm better than any investor who picked one company over the other.

HMLSF ETF Characteristics

We’ve established why ETFs are so attractive to investors (and are the subject of investor self-help books everywhere). But what makes HMLSF better than the alternatives?

It’s important to note the Horizons Marijuana Life Sciences Index ETF was the first of its kind in Canada. Being first went a long way toward establishing it as a trusted name in the industry. The ETF acquired more than $100.0-million in assets under management within one month of existence. This was primarily due to a hunger in the market for a marijuana ETF.

In fact, HMLSF ETF was the most popular Canadian ETF in January 2018, far surpassing even broad market-tracking ETFs. In that month, HMLSF registered inflows of $243.0 million, almost twice that of the BMO S&P 500 Index ETF (TSE:ZSP). (“New pot fund to take on Canada’s most popular ETF of 2018,” The Globe and Mail, January 31, 2018.)

At the moment, the Horizons Marijuana Life Sciences Index ETF has about $800.0-million in total assets under management. This positions it as the dominant player among other marijuana index funds that are just starting out.

While there is a hunger for more Canadian marijuana ETFs, it’s clear that other funds will have a long way to go before they are able to dethrone or even challenge HMLSF ETF as the largest on the market.

What makes this ETF so strong is that it has the heft to bear market slides and it has a fairly comprehensive portfolio that promises a good level of exposure to both the more solid marijuana companies and the ones prone to volatility. This allows investors the chance for massive gains that the industry is known for, with a fraction of the risk.

Other Canadian Marijuana ETFs

While HMLSF ranks among the best marijuana ETFs around, a number of new Canadian marijuana ETFs have cropped up that may intrigue investors. They all offer a slightly different strategy for playing the marijuana market.

Redwood Asset Management launched the Marijuana Opportunities Fund (MJJ) in early February, a rather inauspicious time to get into the marijuana investment game. (“Know what’s in your cannabis ETF: How the four Canadian funds stack up,” The Globe and Mail, February 15, 2018.)

As such, the fund has been stale, with only about five percent in gains over the month. Still, it was the second Canadian marijuana ETF and the first actively managed marijuana fund (HMLSF is not actively managed). Not to mention, five percent growth in February is not all that bad, considering how other marijuana stocks have fared.

It’s too early to tell how the Marijuana Opportunities Fund will fare in the long run. Investing in an unknown entity could be a risk not worth taking for some investors, since it’s hard to gauge the true value of the ETF due to the downswing that the industry has experienced.

On the flip side, many solid marijuana stocks fell substantially in February, potentially making it an excellent time to get in while prices have come down a bit from their lofty heights in late 2017.

That puts the Marijuana Opportunities Fund in a tricky position, and at a disadvantage compared to the Horizons Marijuana Life Sciences Index ETF.

The Marijuana Opportunities Fund didn’t remain the only actively managed marijuana fund for long; Evolve Funds Group Inc launched the Evolve Marijuana ETF (TSE:SEED) in February as well.

“We believe the international cannabis industry is poised to exceed $30 billion by 2021, which would be a 60% compounded annual growth rate in the next few years,” said Raj Lala, president and CEO of Evolve ETFs. (Source: “Evolve ETFs to Launch Actively Managed Marijuana ETF,” Cision, February 9, 2018.)

SEED has a relatively paltry sum in assets under management: less than $1.8 million. MJJ is also sorely lacking, with only $6.9 million under management, compared to the hundreds of millions held by the juggernaut that is HMLSF ETF.

In both cases, while the new ETFs may become promising down the line, it’s too early to recommend them over HMLSF.

A final new Canadian marijuana ETF I’d like to mention is a little brother to HMLSF, the Horizons Junior Marijuana Growers Index ETF (HMJR). It focuses on small-cap companies in the marijuana industry—those with market caps between $50.0 million and $500.0 million.

“HMJR will give investors direct exposure to a growing group of Canadian and global marijuana cultivation and distribution companies,” said Steve Hawkins, president and co-CEO of Horizons ETFs. (“Canada’s First Small-Cap Marijuana ETF to Launch,” Cision, February 6, 2018.

This niche may be tempting for investors who want to see an ETF with higher growth potential, if at the expense of taking on more risk.

The creation of the HMJR fund helps diversify the ETF field, because SEED, MJJ, and HMLSF share many of the same investments—although at different percentages.

HMJR will be listed on the Aequitas NEO Exchange, not the TSE, perhaps seeking to invest in American companies and avoid any consequences of doing so under the new Toronto Stock Exchange regulations. (“Two marijuana-related ETFs, two listing decisions,” Financial Post, February 12, 2018.)

Analyst Take

The expanding field of Canadian marijuana ETFs is exciting and represents a strong alternative to active stock picking. Smaller investors may want to look into them for that reason.

With a variety of new funds popping up in February, both long-time fans of the marijuana industry and investment neophytes may be interested in putting money down on a market that is almost certainly poised to see massive growth, both in the short and long term, as more markets open up and legal marijuana becomes more freely available than ever before.