Traders Remain Short Marijuana ETF's Holdings

Last week was an eventful stretch for the ETFMG Alternative Harvest ETF MJ. The lone exchange traded fund dedicated to cannabis equities rallied following the Nov. 6 midterm elections only to give back a significant chunk of those gains in the following trading days.

MJ tumbled 5.66 percent Friday, finishing the week with a gain of less than 1 percent.

What Happened

The marijuana ETF rallied amid a slew of good news, including Michigan voters approving adult use of recreational cannabis, becoming the tenth state to do so. Missouri and Utah also voted to approve various medical marijuana initiatives while some other states took steps toward loosening cannabis regulations.

While there was plenty of good news driving MJ and its components higher for part of last week, data confirm that traders remain heavily short cannabis stocks, such as Canopy Growth CGC, Aurora Cannabis Inc. ACB, Tilray Inc. TLRY and Cronos Group CRON.

“With the cannabis sector rallying in 2018, short sellers have added almost $1.4 billion of exposure since mid-year, hoping for a reversal in what they believe to be an over-heated and over-valued sector,” according to S3 Partners. “Short interest is now $3.35 billion in the 141 securities we track in our cannabis basket. While short interest in the sector continues to grow in 2018, exposure is very extremely concentrated, with 94% of the short interest in only 10 securities.”

Why It's Important

The $710.47 million MJ tracks the Prime Alternative Harvest Index. The four aforementioned stocks are MJ's top four holdings, combining for roughly 31 percent of the fund's weight. Forty stocks are found on the ETF's roster.

While shorting cannabis stocks can be rewarding, it's far from an inexpensive, low-risk endeavor.

“While short selling and timing the cannabis market may be a profitable endeavor, there is a steep cost to enter the trade. Overall stock borrow costs are very high, with the average stock borrow fee in the sector being 13.44% fee and short sellers spending nearly $1.3 million per day in stock borrow financing costs,” according to S3.

What's Next

Barring a lengthy rally by marijuana stocks, it's likely some traders will continue tempting fate and approaching the sector from the short side.

“We should expect short selling in the cannabis sector to continue to grow, providing a slight counterbalance to the long buying frenzy and also providing trading liquidity in some of the less broadly traded securities,” said S3.

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