Amid Pot ETF's Rally, Shorts Stick With Some Of Its Holdings

Even as a marquee marijuana exchange traded fund listed in Canada recently swelled to $1 billion in assets under management, and as a U.S.-listed equivalent is soaring, some bearish traders are sticking to short positions in marijuana equities.

The ETFMG Alternative Harvest ETF MJ, the only cannabis-related ETF trading in the U.S., was the best-performing ETF listed in New York last month and is surging as investors anticipate Canada's Oct. 17 federal legalization of marijuana. 

What Happened

MJ, which tracks the Prime Alternative Harvest Index, is up 32.19 percent over the past month and resides less than 10 percent below its 52-week high. The ETF is home to well-known cannabis stocks such as Canopy Growth Corp. CGC, Cronos Group Inc. CRON and Tilray Inc. TLRY, among others.

The combined market value of Canadian and U.S. pot stocks trading on major exchanges in those countries recently hit $51 billion, but data indicate short interest in plenty of those names is growing.

Why It's Important

“The rally in cannabis stocks has been celebrated by those who own the stocks; however, it's been a tough run for short sellers in the sector, who had been reducing exposure to the space from $2.15 billion just following the Canadian legalization vote in mid-June, to $1.5 billion at the end of July,” Markit said in a recent note.

“The reduction in short balances was partly the result of share price decline, though the average percent of shares short also declined during that period, from a 4-percent peak in mid-May to 2.7 percent at the end of July. Since then, the rally has driven the short balance to a new all-time high on settlement for Sept. 13 [of] $2.2 billion." 

Canopy Growth, MJ's largest holding at 10.11 percent of the ETF's weight, has seen a decline in short interest as that stock has surged. Not all MJ holdings have avoided rising short interest.

“Tilray Inc has been the hottest stock in the sector in recent weeks, with the share price increasing more than 300 percent from the start of August,” according to Markit. “It's also been popular with short sellers, with Citron Research initially coming out with a long call on the stock on Aug. 15 with a price target of $45/share, a mark it soared past less than two weeks later.”

In less than two months, short interest in Tilray, MJ's third-largest holding at 8.55 percent of the fund, has quadrupled.

What's Next

There is a dearth of Tilray shares available to short, prompting bearish traders to embrace other MJ holdings. That includes Canada's Aurora Cannabis Inc ACBFF, MJ's fourth-largest holding.

“While short sellers have maintained roughly the max position size in TLRY, they've actively added to other positions, including Aurora Cannabis, which was among the more expensive to borrow in the space before considerable issuance of new shares, particularly those relating to the MedRelief acquisition, made borrowing shares easier,” said Markit.

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