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Trading one vice for another: How marijuana stocks compare to the other sin industries

By Alexis Grace
Oct 24, 2018

Recreational marijuana is the newest publicly traded sector within the “vice” stock world, joining gambling, alcohol, and tobacco as other types of so-called sin stocks. And while medical cannabis may skirt the line of the vice-stock definition, the drug’s long history and widespread use as a recreational product place it squarely within this definition.

With cannabis now legal in Canada for both medical and recreational purposes and marijuana stocks on the decline ever since investors might be wondering if it is indeed the best vice industry in which to invest.

[iAnthus and MPX Bioceutical agree to first public-to-public merger transaction in US cannabis history]

Below is an analysis of how the marijuana industry has performed historically in comparison to other vice industries, and how the cannabis sector compares regarding growth and returns potential.

Vice stock-focused ETFs make for an accurate proxy for measuring overall market performance

Exchange-traded funds that focus on a specific industry can be used as a credible measure of that industry’s overall market performance. For example, using an ETF for industry performance analysis is comparable to using the S&P 500 Index as a proxy of the overall U.S. equities market (the S&P 500 covers 80 percent of the total U.S. stock market capitalization).

There are a number of vice ETFs currently available for trading, and to better understand how marijuana is performing in comparison, it’s best to look at recent trends for the ETFs most representative of the respective industry. Below are the selected ETFs for the analysis:

Marijuana: Horizons' Marijuana Life Sciences ETF

While the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) might be the first ETF to come to American marijuana stock investors’ minds, it is not the largest and most comprehensive ETF available to trade at this time. Additionally, they now hold Altria (NYSE:MO) and other tobacco company stock which might skew the analysis on marijuana industry returns.

[Washington halts candy edibles ban for public hearing period]

Horizons' Marijuana Life Sciences ETF (TSX:HMMJ) (OTC:HMLSF), on the other hand, is the largest and most representative marijuana ETF at this time. Their holdings are made up of mostly Canadian stocks, and they seek to replicate the North American Marijuana Index. Since its initial trading date in April 2017 the index yielded a return of over 110 percent, even considering the rough patch it experienced between January and August of this year as well as the waning market levels since October 17.

For comparison, the S&P500 index saw a 15.84 percent return during the same period.


HMMJ vs. S&P 500 since April 2017/ Yahoo! Finance

Gambling: VanEck Vectors Gaming ETF (NYSEARCA:BJK)

The gambling industry is considered another “vice” industry for a myriad of reasons that have developed and changed over time. Similar to marijuana and other vice industries, investors are not required to support or participate in the behavior to recognize the reality of its influence on the economy and potential stock market returns the industry can offer.

The most popular gambling ETF available for trading is the VanEck Vectors Gaming ETF (NYSEARCA:BJK). While gambling and other vice industries tend to be more recession-resilient than others, according to some studies only lottery tickets are a “recession-proof” form of gambling.

[As Shopify processes cannabis orders at lightning speed, Canadian Post strike threatens to grind deliveries to a halt]

VanEck Vectors was established in February 2008 in the heart of the Great Recession, so, unfortunately, there is no data available to see how it would perform in comparison to the overall market. However, the history shows that the gambling ETF has underperformed compared to the S&P500 index since the ETFs initiation, with the S&P500 up 98.35 percent and the gaming ETF down 14.02 percent.


BJK vs. S&P 500 since February 2008/ Yahoo! Finance

Additionally, the data show that the marijuana industry has strongly outperformed the gambling industry, at least during Horizons ETF’s life so far. Horizons ETF is up 115.53 percent since April 2017 while the VanEck Vectors ETF is down 1.42 percent.


Horizons ETF vs. BJK/ Yahoo! Finance

Alcohol: Invesco Dynamic Food & Beverage ETF (NYSEARCA:PBJ)

Of course, the alcohol industry is another comparable vice industry to cannabis (at least with recreational marijuana use), except with a longer history. The Invesco Dynamic Food & Beverage ETF (NYSEARCA:PBJ) seeks to track the investment results of the Dynamic Food & Beverage IntellidexSM Index which is made up of large food and beverage companies. This makes it a good representation of how the beverage industry is performing.

Since the ETF’s initiation in July 2005, the fund has yielded a return of 131.72 percent while the S&P 500 index was up 119.44 percent during the same period.


PBJ vs. S&P 500 since 2005/ Yahoo! Finance

To compare marijuana’s performance to alcohol, we can look at the Horizons ETF returns since its initiation in April 2017 and look at Invesco’s returns in the same period. Horizons has yielded a 110.56 percent return in the period while Invesco has been down 2.26 percent.


PBJ vs. HMMJ/ Yahoo! Finance

Tobacco: AdvisorShares Vice ETF (NASDAQ:ACT) and Altria (NYSE:MO)

There are currently no ETFs with only tobacco companies held within them, but AdvisorShares Vice ETF (NASDAQ:ACT) has about a third of its holdings with tobacco companies. It is also made up of about half alcohol stocks and 20 percent marijuana stocks. For this reason, we will also look at Altria’s performance since they’re the largest tobacco stock on the market.

[Conservative leaders in Canada hint at return to cannabis prohibition should they return to power]

AdvisorShares Vice ETF began trading on NASDAQ in December 2017. Since then, it has only increased in value by 2.00 percent which is almost exactly the return of the S&P 500 index. Altria has been on the decline since then and lost 15.04 percent during the same period.


AdvisorShares and Altria vs. S&P 500/ Yahoo! Finance

Since December 2017, Horizons ETF has been up 30.80 percent, so once again marijuana stocks have taken the lead for recent returns compared to other vice industries.


AdvisorShares and Altria vs. HMMJ/ Yahoo! Finance

Marijuana growth potential in the United States and beyond

With marijuana legalization in Canada going strong, the U.S. is quickly falling behind in the cannabis industry. However, survey results from The Center for American Progress found that 70 percent of Americans support marijuana legalization. There are a number of reasons for this shifting public opinion, including personal enthusiasm to use marijuana for recreation and medical purposes, but more importantly because of the mass incarcerations for nonviolent crimes that have plagued the United States due to prohibition.

The new societal sentiment towards marijuana means there is plenty of growth potential in the United States and beyond for the cannabis industry. The same likely cannot be said about gambling, tobacco, and alcohol because these products are already legal in the United States and are more seasoned.

To bring together the entire analysis below is a chart presenting the year-to-date returns of the four vice ETFs compared to the overall market return as represented by the S&P 500 Index.


Vice ETF Year-To-Date Performance/ Yahoo! Finance

The marijuana ETF, Horizons, has been the most volatile of the vice industries in 2018. However, especially from mid-August until the recent October dip, the marijuana industry has been growing immensely and beating the other vice industries on returns.

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