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Want Tiny Marijuana Stocks? Here's an ETF for You -- With a Twist

Dan Caplinger, The Motley Fool

Investors like exchange-traded funds because they make it easy to invest in hot areas of the market. Right now, nothing's hotter than marijuana stocks, and a flood of interest in the sector has made it a huge magnet for ETF companies looking to tap into the strong demand for investments related to the cannabis industry.

Marijuana ETFs currently exist, but many of them focus on stocks that have already jumped into the stratosphere. For those looking to get into marijuana stocks that have thus far stayed out of the brightest spotlight, the Horizons Emerging Marijuana Growers Index ETF offers a different set of stocks among its holdings. These small companies aren't yet household names even among cannabis investors, and bulls hope that they will earn names for themselves in the marijuana boom and enjoy similar gains to what higher-profile pot stocks have already enjoyed. Yet for U.S. investors, an extra hurdle toward owning shares could make this marijuana ETF somewhat less attractive.

Letters ETF in front of a green graph with upward-climbing bars.

Image source: Getty Images.

The basics of the Horizons Emerging Marijuana Growers Index ETF

The Horizons Emerging Marijuana Growers Index ETF, initially slated to be named Junior Marijuana Growers, started operations earlier this year. The fund's investment objective is to offer exposure to many of the smaller companies in the industry that grow marijuana for medical or recreational purposes. The ETF tracks an index that targets companies that have market capitalizations of between $50 million and $500 million. That's substantially smaller than what some other marijuana ETFs seek to invest in, and many competing ETFs go beyond the production industry to incorporate related companies like cannabis-derived biotech and pharmaceutical companies.

When the ETF first started trading, many investors had never heard of its holdings. Yet now, with the rise in interest in marijuana investing, even some of the emerging pot stocks that the ETF holds have come into the limelight. Top holdings for the fund include Supreme Cannabis (NASDAQOTH: SPRWF), TerrAscend (NASDAQOTH: TRSSF), and Newstrike Brands, and overall, the ETF has about 30 stocks in its portfolio.

How has Horizons Emerging Marijuana Growers done?

So far, the performance of the Horizons marijuana ETF hasn't lived up to investors' hopes. The ETF shares have lost about 10% of their net asset value since becoming available to investors in February. Things were actually far worse for the ETF until last month, as its return since inception fell to -35% in mid-August before the new marijuana craze lifted interest in the industry.

However, investors haven't really gravitated to the emerging marijuana ETF. After selling about half a million shares in its opening week, weekly trading volume fell to between 10,000 and 50,000 during most of the summer. Last week's figures soared to 175,000, but even now, the fund has only around 13 million Canadian dollars in assets under management. By contrast, the ETFMG Alternative Harvest ETF (NYSEMKT: MJ) trades more than 500,000 shares daily on average.

The big hurdle for Horizons Emerging Marijuana Growers

Most of the reason for the ETF's sluggish performance likely has to do with where it's traded. Horizons ETFs related to marijuana trade in Canada, but the fund company didn't even choose to seek to list Emerging Marijuana Growers on the popular Toronto Stock Exchange. Instead, it picked the smaller Aequitas Neo Exchange.

The reason given for that move had to do with its holdings. Some of the companies included in the ETF's tracking index were expected to be U.S. companies, and because of the conflict between U.S. federal and state law governing the legality of marijuana, the fund company decided that listing shares of the ETF on the TSX simply wasn't an option.

U.S. investors therefore face some hurdles in obtaining shares of the ETF. Some U.S. brokers offer direct access to the Aequitas Neo Exchange, but for those who don't, the only option is a pink-sheet listing that has extremely low trading volume and is therefore dangerously illiquid for many of those investors who would otherwise be interested in the fund.

Keep your eyes on small marijuana stocks

The idea of choosing small up-and-coming stocks is often a successful one, whether you're talking about marijuana or any other investment theme. Yet with the liquidity issues and the 0.85% fee that the fund charges, Horizons Emerging Marijuana Growers isn't yet an ideal option for U.S. investors who want to participate in the marijuana-stock boom. If legal status of cannabis in the U.S. changes, then it could lead to much-welcomed change to the ETF's listing location -- but that's not likely to happen in the near future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.