Pot ETF inflows jump, but U.S. wary after Canadian fizzle
This year has been a bad one for chronic anxiety, quality sleep and general optimism. As a result, perhaps, it has been a good year for t he cannabis industry. Cannabis companies in the slow- growing U. S. market have reported record sales, with queues around the block at dispensaries in states where retail sales are legal.
And investors have rushed to cash in on the opportunity. In the days following the U. S. election, when five states with various cannabis legalization measures on the ballots voted in favour, cannabis shares saw spiking trading volumes on day-trading apps such as Robinhood and etoro. The top five shares traded on Robinhood the day after the election were all cannabinoid companies.
But analysts say that despite investor enthusiasm for the legalized cannabis industry, questions remain over its medium- term growth prospects and challenges remain for those looking for access to the actual U. S. cannabis sector.
One of the favoured routes into the industry has been through cannabis ETFS, which saw global inflows jump to US$ 122 million for the month of November, completely driven by U. S. ETF flows, after a monthly average of US$ 14 million over the previous year, according to ETF data provider Trackinsight.
However, cannabis ETF holdings have significant overlap. There are few investment- grade cannabis companies in the sector and the funds instead often contain a large percentage of companies that specialize in sectors such as property or fertilizer. The overlap with other cannabis ETFS can be as much as 68 per cent, according to Trackinsight.
One cannabis- related property company in the U.S. makes up almost 9 per cent of all holdings across the 10 cannabis ETFS analyzed by Trackinsight. British medical cannabis company GW Pharmaceuticals PLC and hydroponics supplier Growgeneration Corp. are also heavily represented in the ETFS.
Optimism for the sector is also driving new products, such as cannabis ETF MSOS, which launched this autumn with a listing on the
New York Stock Exchange. It offers both physical exposure to the U. S. cannabis market as well as synthetic exposure through investments in derivatives and is listed on the NYSE. However, here too analysts sounded a note of warning advising investors to scrutinize the ETF’S underlying exposure.
“This ( rush to launch products) is part and parcel of a perpetual product cycle within asset management industry where fund sponsors want to capitalize on investor interest in everything that is shiny and new — some works out but most of it doesn’t,” said Ben Johnson, director of passive funds research at Morningstar.
Seasoned investors are keeping an eye on regulatory developments. Cannabis is not legalized for recreational, or medical, use in all U. S. states and remains illegal on the federal level — a restriction that has made many reluctant to make bets on growth. Illegality has restricted U. S.- listed companies from listing on U. S. exchanges, even though Canadian companies, which are not breaking any federal laws by operating, are allowed on U.S. exchanges.
In the U. K., the Financial Conduct Authority has set out rules for cannabis companies seeking to list on the London stock market, blocking recreational makers but opening the door to products for medical use.
The regulatory hurdles have helped damp institutional investment enthusiasm. “Institutions still have to be careful because these names might not sit well with a large portion of their client base,” said Mr Johnson. “There is a real friction there, and a level of risk that has to do with optics.”
“Inevitably, across different jurisdictions there are going to be different regulatory considerations and institutional frictions that will prevent and preclude a lot of different types of investors from investing directly or investing in funds that own the stock,” he added.
Nonetheless, those in the U. S. cannabis industry are beginning to sound boisterously optimistic that the trend toward legalization will create a permanent change in the direction of travel for the industry and divert investment away from Canadian cannabis companies towards their homegrown U.S. peers.
Until recently, it was difficult to gain direct exposure to U. S. cannabis. Because of regulatory issues, U. S. cannabis shares were not available on apps such as Robinhood for traders. Whenever the U. S. had positive news on legalization, misdirected enthusiasm meant that Canadian cannabis company shares spiked in value, leading to disappointing returns as the Canadian market struggled to live up to its early hype.
The Canadian market’s failure to deliver on its early promise continues to cause headaches for U. S. cannabis entrepreneurs seeking to raise institutional funding.
“It’s an expensive, highly regulated industry,” said Jason Wild, chairman of recreational cannabis provider Terrascend. “Even though the U.S. businesses are pretty vibrant they were getting taken down by the Canadians ... who didn’t live up to their earnings estimates post- legalization. There was a capital crunch and they couldn’t raise any money.”
Now, cannabis companies and investment professionals think a profound perception shift has begun.
“Practically every state that had legal cannabis deemed cannabis to be essential during the pandemic and allowed it to stay open, which helped people realize that this is a real industry,” said Wild.
That move into the mainstream has been integral to driving increasing investor demand.
Todd Harrison of CB1 Capital, a manager that specializes in cannabis investment, said: “This is going to be about weaning the market off the illicit side of the equation. There are a lot of people who want to buy these stocks who can’t access them.”
Meanwhile, cannabis growers are hoping that the pandemic continues to benefit the sector, as states look to legalization as a way to boost tax revenues to buoy balance sheets.
“You have states with huge holes in their budget, and cannabis is a solution,” said Wild. “Voters have realized that too.”