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Canada Legalizes Marijuana: Two ETFs to Tap the Boom

Sweta Killa
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The outlook for the marijuana industry has brightened after Canada legalized nationwide recreational use of cannabis. Canadians will be able to buy and consume cannabis legally effective Oct 17. The move made Canada the second country in the world to legalize the drug for both medical and recreational use, trailing Uruguay, and the first country among G-7 nations.

A Huge Boon

Overall, legalized marijuana is expected to be a boon for Canada's economy. Prime Minister Justin Trudeau expects that the end of 95 years of prohibition on marijuana will start reducing the estimated C$6 billion ($4.5 billion) immediately in profits pouring into the black market.

Per GMP Securities, the use of recreational cannabis will increase the potential market for Canadian producers by 10 times the existing medical market. CIBC, one of the country's largest banks, predicts Canada's legal marijuana industry to reach $6.5 billion by 2020. Per the latest report from Deloitte, Canada's cannabis market will exceed $7 billion by 2019 and legal sales will make up more than half that amount (read: What Investors Need to Know About Marijuana ETFs).

The legalization will pave the way for merger mania, attracting a large number of deal activities and spur new investments in the industry across the globe, especially the United States. Canada's Tilray recently filed for an IPO with plans to list Class 2 shares on the Nasdaq under the ticker TLRY and the publisher of the marijuana magazine High Times also plans to apply for a listing on Nasdaq later this year. Meanwhile, Aurora Cannabis, one of Canada's largest marijuana companies, is seeking investments in the United States through a spun-off subsidiary.

In the United States, nine states and Washington, D.C., currently have legalized recreational marijuana, while 29 states have legalized medical weed. Growing legalization of recreational or medical marijuana in various countries will propel revenue growth in the near future. According to a new report by Grand View Research, the global legal marijuana market is expected to reach $146.4 billion by end of 2025

Marijuana Stocks Surge

The news led to a surge in shares of marijuana producers. Shares of Canopy Growth Corp, Canada’s biggest marijuana producer by market value, jumped 6.7% in yesterday’s trading session, followed by gains of 4.7% for Aurora Cannabis, the second biggest producer and 4.2% for Aphria, the third largest. Cronos Group (CRON) shot up 5.25% while MedReleaf rose 3.6%. The upsurge in these stocks led to a rally of 3.3% in the Canadian Marijuana Index and 2.2% in North American Marijuana Index (read: Marijuana and Blockchain: 2018's Hottest New ETFs).

ETFs to Tap

ETFMG Alternative Harvest ETF MJ

This is the first and only ETF targeting the cannabis/marijuana industry. It tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem, benefiting from global medicinal and recreational cannabis legalization initiatives. The fund holds 39 securities in its basket with each holding less than 7.6% share. Canadian firms make up 61% of the portfolio while American firms comprise just 26%.

The ETF has amassed $398.1 million in its asset base so far and trades in a heavy volume of more than 1.5 million shares. It charges 75 bps in annual fees and climbed 2.3% in yesterday’s trading session.

AdvisorShares VICE ETF ACT

Another way to play the upcoming boom in marijuana industry is with ACT. It not only targets the cannabis industry but also offers concentrated exposure to “vices” including alcohol and tobacco. The fund 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 (read: 8 New ETFs of 2017 to Explode in 2018).

Specifically, the fund has 20% exposure to cannabis-related companies. It is an actively managed fund and has attracted $13 million in AU since its debut in mid-December. The ETF has 0.75% in expense ratio and trades in lower average daily volume of nearly 11,000 shares. It was up 1.1% in the last trading session.

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