Marijuana-related ETFs yield different decisions

FOff the Record or most sectors, where to list a new ETF is one of the easiest of the hundreds of small decisions a provider has to make: Just follow the herd and opt for the TSX.

But for ETFs that offer exposure to medical marijuana sector, the decision is more complex because of a slew of regulatory factors and the different approaches taken by the country’s stock exchanges.

This week two providers reached different conclusions on that matter.

On Monday, units of the actively managed Evolve Marijuana ETF (symbol SEED) started trading on the TSE. It aims to provide Canadian investors with long-term capital appreciation “by actively investing in a diversified mix of equity securities of issuers that are involved in the marijuana industry.” It will take a global approach.

On Wednesday, trading in the passively managed Horizons Junior Marijuana Growers Index ETF gets underway.

That ETF, whose benchmark is the Emerging Marijuana Growers Index, is being sponsored by Horizons ETFs Management (Canada) Inc. (That group was behind the April 2017 launch of the country’s marijuana-focused ETF, the Horizons Marijuana Life Sciences Index ETF. That fund is home to $700 million of assets.)

But unlike the earlier version, Horizons is not listing its current product (symbol HMJR) on the TSX. Instead the product — it offers direct exposure to small-capitalization companies primarily involved in the cultivation, production and/or distribution of marijuana — will be listed on the Aequitas NEO Exchange.

Mark Noble, Horizons’ head of sales strategy, said the listing decision was made as a result of a TSX and TSX Venture ruling last October concerning listed companies engaged in the marijuana business, either directly or indirectly, in the United States. In the U.S. recreational marijuana has been legalized in certain states, but is illegal under U.S. federal law. At the time, the law firm, Faskens made this conclusion: “In short, marijuana, the United States and listing on the TSX/ TSXV do not mix.”

Last Thursday, the Canadian Securities Administrators, the umbrella group of provincial securities regulators, weighed in with an updated “disclosure expectations for issuers in this space.”

In light of political and regulatory uncertainty surrounding the treatment of U.S. marijuana-related activities, the CSA said “a disclosure-based approach remains appropriate in the current circumstances.”

The CSA also made comments on exchange listings. It noted each exchange “applies its own listing requirements as outlined in its rules including rules related to compliance with applicable laws.” In other words, the issuers are required to provide guidance that their U.S. operations meet state requirements.

Considering those regulatory factors, Horizons’ Noble said a NEO listing emerged as the best outcome because it provided the greatest flexibility. “Our upcoming listing for HMJR will have exposure to both foreign (mostly from Australia, which has a dozen marijuana listings) and Canadian-listed companies that have operations in the U.S. Listing on NEO gave us the flexibility to hold more stocks without exposure.”

At least two companies in the index — Marapharm Ventures and Liberty Leaf Holdings — have U.S. operations. Both are listed on the Canadian Securities Exchange, but neither is eligible for listing on the TSX or the TSX Venture. “If we had the ETF listed on the TSX or the TSXV we would not be able to hold those particular stocks,” said Noble.

Evolve reached a different conclusion. Raj Lala, chief executive, said two factors were at work: its other eight ETFs are listed there; and the current U.S. legislation on marijuana. “Until that’s all sorted out we thought it made sense to invest in the global opportunities,” he said.