A decade ago, you’d have to be high to think you could make money off of marijuana stocks because they didn’t exist. Today, legal cannabis has become a genuine growth industry, and investment opportunities abound. For that, you can thank the rising number of states that have legalized weed for both recreational and medical uses.
You can tap into the market for legal and licensed cannabis by buying cannabis stocks or exchange-traded funds. Keep reading to learn more about cannabis laws in the United States and the best ETFs for 2021.
The Legal Status of Cannabis in the United States
Colorado was the first state to legalize cannabis for recreational use, way back in 2012. Today a total of 19 states and Washington, D.C., have legalized weed, even though it remains illegal at the federal level.
Here’s a rundown of the legal status of cannabis across the country:
States and Jurisdictions Where Recreational Marijuana is Legal
- Washington, D.C.
- New Jersey
- South Dakota
- New York
- New Mexico
Meanwhile, a total of 36 states plus the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have approved the medical use of marijuana.
Understanding the Risks of Investing In Cannabis ETFs
The main risk of investing in cannabis ETFs is that the legal marijuana industry is still very young. You have a limited number of stocks to choose from, and those that do exist haven’t had much time to build up financial track records. Many of the investments you make will be extremely speculative.
Another risk is that cannabis laws and tax rules tend to be all over the map in the U.S. — both literally and figuratively. Federal law still classifies marijuana as a Schedule I substance under the Controlled Substances Act, meaning it is considered to have a high potential for dependency with no accepted medical use, making distribution of marijuana a federal offense. Even in states where pot is legal, laws vary over how it can be sold, used and taxed.
Investing in cannabis ETFs helps lower some of the risk because these funds hold shares of multiple companies, meaning your investment is not dependent on the performance of a single company.
Top Cannabis ETFs To Consider
The diversification you get with a cannabis ETF gives you some protection in an industry prone to extreme moves. That by itself makes marijuana ETFs worth exploring. Here are six cannabis ETFs that warrant a closer look.
ETFMG Alternative Harvest ETF (MJ)
MJ launched in 2015 and has grown into the biggest cannabis-focused ETF out there, with nearly $2 billion in assets under management. This ETF tracks the Prime Alternative Harvest Index. As of late June, its top three holdings were Tilray (TLRY), GrowGeneration (GRWG) and Canopy Growth Corp. (CGC). As of July 2021, MJ owns only about 30 stocks, but its annual portfolio turnover ratio is high at 46%, which suggests that fund managers flip stocks regularly to generate income and pay dividends, as noted by Seeking Alpha.
The Cannabis ETF (THCX)
The Cannabis ETF follows an index of companies that cultivate, produce or distribute cannabis for medical or recreational purposes. It started trading in July 2019. THCX’s top three holdings as of late June were Tilray (TLRY), Canopy Growth Corp. (CGC) and Village Farms International (VFF).
Cambria Cannabis ETF (TOKE)
Cambria targets anywhere from 20 to 50 of the top companies in the marijuana space. It puts 80% of its net assets in cannabis companies that exist across a broad market capitalization spectrum of micro-, small- and mid-cap stocks. It has a fairly low expense ratio of 0.42%. Cambria’s top three holdings as of mid-July are Tilray (TLRY), Innovative Industrial Properties (IIPR) and Constellation Brands (STZ).
AdvisorShares Pure US Cannabis ETF (MSOS)
MSOS is an actively managed ETF, which means its managers can react accordingly to daily market movements. AdvisorShares Pure US Cannabis began trading in September 2020. Its top holdings include leading multistate operators such as Green Thumb Industries (GTBIF), Curaleaf Holdings (CURLF) and Trulieve Cannabis Corp. (TCNNF). This ETF offers exposure to large U.S. cannabis operators, though some of the companies it holds do not get a lot of market attention, as reported by U.S. News & World Report.
Amplify Seymour Cannabis ETF (CNBS)
Amplify Seymour Cannabis is another actively managed ETF. Pure-play cannabis companies make up 80% of its stock holdings. As of late June, CNBS had more than doubled in value over the previous year. Its largest holdings include WM Technology (MAPS), Tilray (TLRY), Village Farms International (VFF) and Canopy Growth Corp. (CGC).
AdvisorShares Pure Cannabis ETF (YOLO)
YOLO tracks Canadian and U.S. companies in the healthcare, real estate and consumer products sectors. The actively managed ETF’s top three cannabis holdings are Village Farms International (VFF), Innovative Industrial Properties (IIPR) and GrowGeneration Corp. (GRWG). It invests most of its net assets — a minimum of 80% — in securities of companies that derive at least half of their net revenue from the hemp and marijuana business, as well as in derivatives or instruments that have economic characteristics similar to those securities.
Will Healy contributed to the reporting for this article.
Data on ETFs was sourced from U.S. News & World Report, TheStreet, MarketWatch and Seeking Alpha. Data was compiled on July 17, 2021, and is subject to change.