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Is REX Shares' Leveraged Cannabis ETN Launch Untimely?

Sanghamitra Saha

On Dec 11, REX Shares announced the trading of two marijuana-focused products, one among which is the first leveraged cannabis exchange-traded product in the United States. The two products are MicroSectors Cannabis Index ETN MJJ, a 1x version of the Exchange Traded Notes linked to the Indxx MicroSectors North American Cannabis Index and The MicroSectors Cannabis 2x Leveraged ETN MJO, which will look to provide 2x leveraged exposure to the index.

Inside the Products

The ETNs are senior, unsecured obligations issued by the Bank of Montreal. MJO charges 95 bps in fees and MJJ charges 70 bps. The index is heavily weighted on AbbVie (9.9%), Agilent Technologies (9.9%), Mettler-Toledo International (9.9%), Thermo Fisher Scientific (9.9%), Waters Corporation (9.9%) and Canopy Growth (7.1%).

In total, there are 23 constituents. “The ETNs' benchmark tracks U.S. and Canadian stocks selected across five subthemes: cultivation, pharmaceuticals, testing and analytics, industrial hemp and ancillary products,” per etf.com.Notably, the investor is subject to the credit risk of the issuer in case of Rex Shares’ products. 

Is the Launch Untimely?

The current backdrop for marijuana investing is unfavorable. The ETFMG Alternative Harvest ETF MJ lost 47.8% in the past six months (as of Dec 11, 2019). Short sellers flocked to the space in November. Tilray TLRY, Cronos CRON and Aurora Cannabis ACB shares have all lost more than half their value from their highs earlier this year.

Cannabis stocks were among the most expensive bearish bets in late November. Stocks were battered by Canadian market oversaturation. Downbeat earnings from industry majors also weighed on the space(read: Marijuana ETFs Bounce Back: Can the Rally Last?).

Agreed, shares of marijuana companies received a short-term respite in late November after a U.S. congressional committee passed a legislation that would end the federal embargo on weed. But an approval by the full House and Senate should take time and will likely see many revisions in the process (read: Can Bill Hopes Relieve Earnings-Induced Pain in Pot ETFs?).

Any Hope Ahead?

Any rally from here depends on how things progress in the United Statesas investors focus shifted toward opportunity in the United States, the world’s largest cannabis market (one-third of global demand),” per a CFRA analyst.

The latest U.S. congressional committee’s bill will enact a 5% federal sales tax on marijuana products that are manufactured in or imported into the United States and obliterate past criminal records. The latest approval comes two months after the “House passed a bill to advance legislation that would allow banks to provide services to cannabis companies in states where it is legal,” per Reuters. All these efforts open up opportunities for the new REX Shares’ funds.

Competition

The products do not have any competition as such. First of all, all the existing products are structured as ETFs not ETNs. And no product is leveraged in nature (read: One More Marijuana ETF on the Block).

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