Managers Explain Their Cannabis ETFs: MJ

By Natan Ponieman and Javier Hasse.

In this four-part series, Benzinga is taking an exclusive look at some of the highest valued, US-traded cannabis ETFs.

For part one, we're spotlighting ETFMG Alternative Harvest ETF MJ, which launched in December 2017 — making it the first cannabis-focused ETF to list in the United States. 

With over $567 million in assets, MJ is the largest and most liquid ETF in the market. It's also considered a passive ETF that tracks the Prime Alternative Harvest Index.

To learn more, Benzinga spoke with MJ director Jason Wilson:

BZ: Can you explain the fund's criteria for putting together it's portfolio?

JW: MJ’s criteria is, firstly, to invest in companies that generate the majority of their revenue from the growing of cannabis, or the manufacturing of cannabis-related products such as cannabinoid prescription drugs. Generally, these companies will have a higher individual weighting and will collectively comprise the majority of MJ’s portfolio.

MJ’s secondary criteria is to invest in companies that are ancillary to the industry, but that are expected to benefit from the growth of the global cannabis industry. This will include, for example, companies that are engaged in the creation, production, and distribution of fertilizers and growing equipment for cannabis. Regardless of whether or not a company is directly engaged in the industry, all of MJ’s holdings must meet minimum market cap and liquidity requirements.

What's the fund's strategy and why is it a better approach than the one taken by other cannabis ETFs?

MJ tracks the Prime Alternative Harvest Index, which is designed to measure the performance of companies within the cannabis industry ecosystem benefiting from global cannabis legalization initiatives. 

During the early stages of an emerging industry, it is difficult to determine, with any certainty, what specific business strategy will be most successful. Accordingly, investing more broadly across an emerging industry can provide investors with better risk adjusted returns with less volatility.

Unlike many other cannabis ETFs, which tend to focus almost exclusively on companies that grow cannabis or manufacture cannabis-related products, MJ embraces a broader strategy by including companies that are likely to be influenced and benefit by the cannabis legalization initiatives taking place around the world.

This involves investing not only in companies that are primarily engaged in the cannabis industry, but also includes companies that comprise other parts of the cannabis industry ecosystem, such as companies that provide equipment and services to cannabis producers, companies that manufacture products used in the consumption of cannabis, and to a lesser extent, companies that — although not currently engaged in the cannabis industry — may be expected to benefit as the cannabis industry expands globally. 

This differentiated approach recognizes the fact that the cannabis industry is intertwined with many industries, and that many companies outside the cannabis industry ecosystem are likely to benefit from the continued move to legalization world-wide.

Why are ETFs a good investment option for retail investors with little knowledge of the cannabis market? Also, are they any good for experienced investors?

In any industry, let alone an emerging industry with a fragmented regulatory structure, it is difficult for any investor, inexperienced or experienced, to pick the individual winners and losers of an industry – for every Facebook there will typically be more than one MySpace and Friendster. 

ETF that are large and liquid enough can provide investors with broad exposure to an industry, giving them the opportunity to benefit as the sector grows and becomes profitable, while reducing the volatility inherent in selecting single names. For investors that trade more frequently, ETFs may prove to be a more efficient and lower cost option as they can move in or out of an industry with one trade, versus trading a basket of names.

Lead image by Ilona Szentivanyi. Copyright: Benzinga.