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What should you know about Cannabis ETF investing?

Updated: Mar 18

To start, what is cannabis?

Cannabis refers to a group of three plants within the Cannabinaceae family with psychoactive properties, known as Cannabis sativa, Cannabis indica, and Cannabis ruderalis.

When the flowers of these plants are harvested and dried, you are left with one of the most common drugs in the world. Some call it weed, some call it pot, and others call it marijuana.

What should you know about Cannabis ETF investing? | Cannabis Plant | The Globetrotting Investor
Image from Wikipedia - Cannabis

Although cannabis is made up of more than 120 components, which are known as cannabinoids, the two main components are delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD).

THC is the main psychoactive compound in cannabis which affects the way your brain perceives the world around it. It acts on the body’s endocannabinoid system and is the cannabinoid responsible for making people feel intoxicated or euphoric. THC is responsible for the “high” that most people associate with cannabis.

CBD does not act on the same neurological pathways. Researchers believe that CBD acts instead on the brain’s serotonin system, which regulates mood, sleep, appetite, and desire. It may calm and relax you rather than alter your perception. It also does not affect physical reactions as much.

The most common uses for medicinal cannabis include severe or long-term pain, nausea and vomiting due to chemotherapy. It is also reported that it is useful in treating epilepsy and multiple sclerosis. Unfortunately, cannabis is also widely abused.

There are three primary types of companies in the cannabis industry:

Cannabis growers and retailers: These companies cultivate, harvest, and distribute cannabis to customers. Some also operate retail stores that sell medical/ recreational cannabis.

Cannabis-focused biotechnology companies: These companies participate in the industry by extracting cannabinoids from cannabis to develop new pharmaceutical drugs.

Ancillary product and service providers: These companies support the industry by providing products and services such as hydroponics products, lighting systems, or management services.

What should you know about Cannabis ETF investing? | Cannabis Harvester | The Globetrotting Investor
Image from Henry’s Hemp Harvester

The value of the worldwide legal cannabis market is projected to increase and reach $91.5 billion by 2028, according to Grand View Market Research. It is no wonder that many investors want to profit from this tremendous growth.

However, instead of investing in specific stocks, you can minimise your risk by investing in cannabis ETFs.

The two largest cannabis ETFs by assets under management are:

Both ETFs also have an expense ratio of <1.0%*

MSOS is the first actively managed U.S.-listed ETF with dedicated cannabis exposure focusing exclusively on U.S. companies, including multi-state operators. The ETF allocates across an investable universe of U.S. companies spanning a variety of cannabis-related businesses.

Its top holdings are Green Thumb Industries (OTC: GTBIF), Trulieve Cannabis (OTC: TCNNF), and Curaleaf Holdings (OTC: CURLF).

MJ is the first ETF to target the global cannabis market. The fund tracks an index of stocks across the globe that are engaged in the legal cultivation, production, marketing, or distribution of cannabis products for either medical or nonmedical purposes.

Its top holdings include Aurora Cannabis (NASDAQ: ACB), SNDL Inc (NASDAQ: SNDL), and Canopy Growth (NASDAQ: CGC).

But even investing in cannabis ETFs comes with considerable industry-related risk.

These are the three main risks that have created a lot of volatility.

Legal and political risks: Selling cannabis remains illegal at the federal level in the U.S. and the law places severe restrictions on banks that deal with cannabis-related businesses. This makes it difficult for U.S. cannabis businesses to access financial services. The future of legalising or decriminalising cannabis is also uncertain.

Increased competition: The growth potential of the industry attracts a lot of new companies looking to capitalise on a booming industry. This means that it will be competitive for a commodity business which can impact shareholders’ return on investment. Just because an industry is poised for growth, it does not mean that shareholders will benefit.

Over-the-counter (OTC) stock risks: Many cannabis companies trade on OTC markets. This means they are not required to regularly file financial statements and they do not have to maintain minimum market capitalisations.

Bottom line

Although there are potential growth opportunities in investing in cannabis ETFs, you need to understand and acknowledge the risks involved. Always do your research and never invest based on hype.

*This is not financial advice. It is for educational purposes.


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