Horizon’s billion-dollar ETF: The real deal, or a marijuana stock “get rich quick” scheme?
By Jacqueline Havelka
Sep 12, 2018
If you aren’t “all in” on investing in the cannabis industry, perhaps you should be. Imagine investing in an Exchange-Traded Fund on August 1, and reaping a 43 percent return as of September 1. It’s not fantasy; it’s Horizons.
The Horizons Marijuana Life Sciences Index ETF (HMMJ.TO), has done just that. In the last month, the fund has experienced a 43 percent increase, driven mainly by the announcement from alcohol giant Constellation Brands regarding its $4 billion (yes, billion with a B) investment in cannabis giant Canopy Growth Corp. (TSX:WEED). Last October, Constellation took a 9.9 percent stake in Canada-headquartered Canopy Growth. Canopy is the second largest holding in the HMMJ, and the Canopy/Constellation news drove the value of the HMMJ over CAD$1 billion for the first time.
Horizons Chief Executive Officer Steve Hawkins stated that the CAD$1 billion assets have “far exceeded our expectations.”
“One of the key drivers of HMMJ’s rapid asset growth speaks to the investor demand and desire for a diversified portfolio of cannabis companies versus buying individual stocks," Horizons CEO Steve Hawkins said in a statement. “While there are clearly leaders in the marijuana equity sector, nobody knows for sure which companies will truly be successful over the long term or even be swallowed-up.”
Exchange-traded funds, or ETFs, are similar to mutual funds in that they bundle individual securities into one diversified portfolio. ETFs typically have lower operating costs because they are exchange-traded rather than actively managed. HMMJ is less than 18 months old, launched in April 2017. Reaching CAD$1 billion in value is a feat that many analysts are calling an amazing accomplishment, given the novelty of the ETF. Indeed, the value is a hallmark that definitively reflects the increasing global demand for cannabis. Clearly, Canada’s impending October 17 recreational cannabis legalization is attracting investors to not only individual stocks but also to ETFs.
In total, HMMJ comprises about 40 stocks, with Canopy in the top two of a portfolio focused on medical marijuana. Cronos Group (NASDAQ:CRON) (TSX:CRON) also occupies a top spot in the ETF, with Aphria Inc. (TSX:APH)(OTC:APHQF) holding the top spot at about 17 percent of the total fund.
The ETF has a few outliers as well, including Scotts Miracle-Gro (which includes the acquisition of leading U.S. hydroponics distributor Sunflight Supply). Also included in HMMJ are drug manufacturers like Insys Therapeutics, which makes synthetic marijuana products, as well as the opioid Subsys.
Investors should proceed with caution
Despite the fantastic pinnacle that HMMJ has reached, many analysts caution investors about ETF stock prices. First, the prices reflect future sales and earnings rather than current figures. Second, because the cannabis sector is so new and rapidly emerging, it is difficult to make growth estimates.
Bloomberg Financial recently described Canada as literally “swimming in ETFs.” Furthermore, new entrants and smaller ETFs are finding it very difficult to participate in the market.
Marijuana stocks struck with ETF fever
While HHMJ has seen a sharp increase in the last month, the ETF is up about 22 percent for the entire year. Other ETFs like the Alternative Harvest ETF are close on the heels of the HMMJ; the ETF is closing in on nearly $500 million in assets.
There are several ETFs that track marijuana indices. In fact, PotNetwork did a recent review and found five swoon-worthy ETFs into which investors should look. ETFs can help investors diversify cannabis portfolios. For investors looking for lower risk and less upfront capital (and who isn’t), ETFs provide an effective way for investors to capitalize on the industry’s overall growth while creating less of a hit when any one stock decreases in value.
Horizon's management team may be on to something: in their recent statement, they said that the primary reason why ETFs are so attractive to investors is that no one knows for sure which cannabis companies are going to be around for the long haul. Many companies are getting “swallowed up,” and it’s hard to tell which ones will truly be successful for the long term, long after the frenzy of the October 17 date has passed.