Another Cannabis ETF on the Way
With the marijuana industry rapidly gaining ground on increasing legalization, Innovation Shares has filed for Innovation Shares Cannabis ETF with the Securities and Exchange Commission. This will be the second ETF targeting weed stocks.
What’s Driving the Move to the Niche Space?
Like bitcoin made investors go on a mad rush last year, it’s marijuana stocks this year. This can be attributed to increasing legalization of the plant for recreational use.
Though cannabis remains illegal at the federal level in the United States, nine states and the District of Columbia have legalized recreational marijuana while 30 states have legalized medical weed. Marijuana has also become fully legal in Canada effective Oct 17. In fact, the Canadian legalization led to terrible trading in the pot stocks but the outlook remains bright (read: What Went Wrong With the Marijuana ETF on Wednesday?).
The growing legalization of recreational or medical marijuana has paved the way for mergers, spurring a large number of deal activities in the industry. A number of alcoholic beverage companies are investing or partnering with cannabis producers.
According to the Arcview Market Research, the U.S. legal cannabis market is projected to reach $11 billion in consumer spending this year and more than $23 billion by 2022. Per an analyst at Cowen, the U.S. legal cannabis industry is expected to reach $75 billion in sales by 2030, surpassing the carbonated soft drink market in 2017 (read: Will Cannabis ETFs be on a High Again?).
The proposed ETF will provide investors another option to capitalize on the booming marijuana industry. While key information – such as expense ratio and holdings breakdown – was not available in the initial release, other important points were released in the filing. Here’s an insight into the filed ETF:
A Glance at the Proposed ETF
The new marijuana ETF looks to follow the Innovation Labs Cannabis Index. The benchmark is a proprietary, rules-based index designed to track the performance of companies in the United States and Canada that have a business interest in legal cannabis, hemp or CBD-based (i.e., products that contain cannabidiol) pharmaceutical and consumer wellness & product markets.
ETF Competition & Bottom Line
There is a huge appetite for this fund despite a few choices already available in the space. ETFMG Alternative Harvest ETF MJ — the first and only pure ETF targeting the cannabis/marijuana industry — has accumulated $661.7 million in AUM and charges 75 bps in annual fees (read: Top and Flop ETFs at Half-Way Q4).
Another ETF — AdvisorShares VICE ETF ACT — not only targets the cannabis industry but also offers concentrated exposure to “vices” including alcohol and tobacco. It might pose some threat to the proposed fund. ACT invests in companies that derive at least 50% of their net revenues from the marijuana and hemp industry or have at least 50% of their company assets dedicated to lawful research and development of cannabis or cannabinoid-related products. The ETF has amassed $13.3 million and charges 75 bps in annual fees.
The proposed fund, if approved, could give investors another pure play on cannabis industry. It will not be difficult for the proposed ETF to garner sufficient investor interest in the ongoing green rush space and generate decent total returns net of expense ratio.
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