Canada’s big pot ETF re­ceives mi­nor tweaks after over­haul of in­dex it tracks

The Globe and Mail (Ottawa/Quebec Edition) - - REPORT ON BUSINESS | GLOBE INVESTOR - DAVID MIL­STEAD IN­STI­TU­TIONAL IN­VEST­MENT RE­PORTER With files from re­porter Clare O’Hara

Big changes in the com­po­nents of the lead­ing pot­stock in­dex have re­sulted in only a few tweaks to the lead­ing cannabis ex­change-traded fund, as its man­ager has de­cided not to sell the shares of sev­eral small com­pa­nies that swooned last year.

In a quar­terly re­bal­anc­ing, the Ger­man firm So­lac­tive has cut 12 stocks from its North Amer­i­can Mar­i­juana In­dex, the ba­sis for TSX-listed Hori­zons Mar­i­juana Life Sciences In­dex ETF (ticker sym­bol HMMJ). While So­lac­tive doesn’t com­ment on spe­cific changes, the stocks seemed to have dropped below So­lac­tive’s min­i­mum mar­ket-cap­i­tal­iza­tion thresh­old of $67.5-mil­lion in re­cent weeks.

The dele­tions, off­set by five ad­di­tions, took the in­dex from 61 com­pa­nies down to 54. How­ever, Mark No­ble, a spokesman for Hori­zons, says it did not drop any stocks from the ETF – the largest cannabis-based fund with nearly $800-mil­lion in as­sets – when it ad­justed its hold­ings after the So­lac­tive re­bal­anc­ing.

The move, atyp­i­cal for an ETF that seeks to track an in­dex, re­flects the volatil­ity in the pot­stock sec­tor, with wild swings in share prices dra­mat­i­cally re­shap­ing com­pa­nies’ mar­ket value on a reg­u­lar ba­sis. Mr. No­ble notes that while the ETF’s goal is to repli­cate the in­dex’s per­for­mance, the fund isn’t re­quired to hold the un­der­ly­ing shares ex­actly in the same align­ment as the in­dex does. In­deed, five of the 12 stocks dropped from the in­dex weren’t in the ETF to be­gin with, leav­ing seven in­dex dele­tions Hori­zons has de­cided not to sell.

The con­cern for Hori­zons is manag­ing trad­ing costs, Mr. No­ble said. The port­fo­lio man­age­ment team de­ter­mined the dropped stocks are fairly close to the $67.5mil­lion in­dex min­i­mum “and rather than sell them and have to po­ten­tially re-buy them shortly again if the mar­ket move­ment brings their mar­ket cap back over that thresh­old, we have opted to take a more wait-and-see ap­proach with these names.”

Mr. No­ble said, how­ever, that Hori­zons could in­deed exit one or more of the stocks dur­ing the quar­ter, as Hori­zons re­bal­ances at times other than So­lac­tive’s quar­terly an­nounce­ment, some­times in an­tic­i­pa­tion of changes in the in­dex.

There are other dif­fer­ences be­tween the in­dex and the ETF: The TSX-listed HMMJ doesn’t in­clude shares of cannabis firms that do most of their busi­ness in the United States, where the drug is il­le­gal un­der fed­eral law, be­cause the TSX last year banned the list­ing of mar­i­juana com­pa­nies that breach U.S. fed­eral drug laws.

While Hori­zons won’t com­ment specif­i­cally on how that af­fects ad­di­tions and dele­tions, the three new com­pa­nies in the ETF – Auxly Cannabis Group Inc., Kh­i­ron Life Sciences Corp. and Medipharm Labs Corp. – op­er­ate in Canada. the two ad­di­tions to the So­lac­tive in­dex that didn’t join Hori­zons’ ETF – Har­vest Health & Recre­ation Inc. and Trulieve Cannabis Corp. – are U.S.based and sell in var­i­ous states’ recre­ational mar­kets.

Also, while a large num­ber of com­pa­nies were cut from the in­dex, their small mar­ket cap­i­tal­iza­tions meant they didn’t take up a ter­ri­bly large por­tion of the in­dex, or of the ETF. At the close of trad­ing on Jan. 10, the seven deleted in­dex stocks rep­re­sented 1.32 per cent of the HMMJ port­fo­lio.

The stocks deleted from the So­lac­tive in­dex that Hori­zons is keep­ing, for now, are: Be­leave Inc.; GTEC Hold­ings Ltd.; In­diva Ltd.; In­med Phar­ma­ceu­ti­cals Inc.; James E. Wag­ner Cul­ti­va­tion Corp.; Lexaria Bioscience Corp. and THC Biomed In­ter­na­tional Ltd.

At the close of trad­ing on Jan. 10, the seven deleted in­dex stocks rep­re­sented 1.32 per cent of the HMMJ port­fo­lio.

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