The recent craze around cannabis sent investors buying shares in big names like Tilray (TLRY) and Canopy (CGC), as well as the only exchange-traded fund listed in the U.S. that tracks cannabis companies.
The ETFMG Alternative Harvest ETF (MJ), has risen by 31.5% since March. Jason Wilson, president of Budding Equity Asset Management, launched the ETF in partnership with ETF Managers Group in December. Alcoholic-beverage maker Constellation Brands’ $4 billion investment in Canadian marijuana grower Canopy Growth was the largest catalyst, said Wilson. Since that deal, investments in the ETF have doubled. Now the ETF has over $658 million assets under management.
The investor frenzy could be an indicator of mania. “I think anytime you see overexuberance in the market, particularly in the retail sector where they come in a lot of buying activity, not on fundamentals necessarily just on fear of missing out, that’s always a problem,” Wilson said on Yahoo Finance’s Final Round on Monday. “I do agree there is a lot of overexuberance and some of these companies are definitely trading at valuations that aren’t really wanted.”
Tilray, the ETF’s largest holding, had a wild run. Tilray’s share price has been cut by more than two thirds since hitting an all-time high of $300 on Sept. 19. At Yahoo Finance All Markets Summit, former hedge fund manager Mike Novogratz said the price of cannabis stocks today are like bitcoin and ethereum in December.
Wilson argues that the cannabis business is more tangible. “It touches multiple verticals so this is a new and emerging area that has a number of touch points, and there’s a lot of tangibility behind it. And it’s not just a movement in Canada or the U.S. It’s a global movement,” said Wilson.
Pharmaceutical and alcohol companies have shown interest in the cannabis sector for its medical and recreational opportunities. Molson Coors Brewing Co (TAP), for example, is developing a non-alcoholic, cannabis-infused beer with Canadian marijuana producer Hydropothecary.
On the other end, cannabis growers and researchers are also riding the wave of the global wellness movement. “If you look at the pharmaceuticals that are sold globally, a significant portion of them are for pain relief, for sleep assistance, for anxiety. And these are all things that a lot of the cannabinoids that are in cannabis are very helpful at treating or helping moderate,” Wilson said. Most companies in ETFMG Alternative Harvest ETF’s portfolio focus on medicinal marijuana.
Just like how ICO scams sprung up with the rise of cryptocurrency prices, Wilson sees similar scams emerging in the space as people promise unrealistic returns. But he believes his fund has an advantage by focusing on major players in the industry. Canopy Growth, Tilray, Cronos (CRON), and Aurora Cannabis (ACBFF) make up 40% of ETFMG Alternative Harvest ETFs investments, which Wilson believes will become market leaders.
“These are companies with no strong executive teams, lots of capital, efficient access to the capital markets. They operate in many markets not just in Canada. They are federally regulated. They check all the boxes for becoming leaders in this new industry,” said Wilson. “It’s like going back to the prohibition days if you knew who the big distilleries were going to be.”
Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.