The world’s first cannabis exchange-traded fund is set to become the second most profitable exchange-traded fund (ETF) in Canada after returning more than 50 per cent so far this year.
The Horizons Marijuana Life Sciences Index fund has grown to $1.3 billion (€1.1 billion) in assets despite some outflows this year, making it the 18th largest Canadian ETF, according to data provider ETFGI.
Its high management charge and ability to recoup large fees from lending stock mean it is fast catching the country’s most profitable ETF, which is more than five times its size.
The growth of the Horizons ETF highlights the popularity of thematic ETFs, particularly the handful that focus on the nascent legal marijuana industry in North America.
“There is high demand for these products without much supply, which allows the managers to charge a premium and be almost immune to the fee pressure that is widespread across the industry,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA, a research company.
Typical charge
The Horizons ETF charges 75 basis points (bp), or 75 cents for every $100 invested, which is several times the typical charge on a more general product. By contrast, the $7 billion (€6.1 billion) iShares S&P/TSX 60 Index ETF, Canada’s biggest, charges 20bp.
Mr Rosenbluth said he knew of just one cannabis ETF in the United States, the $1.1 billion (€970 million) ETFMG Alternative Harvest ETF, known by its ticker as MJ. He said several managers had applied to the Securities and Exchange Commission, the US regulator, to create similar products.
He said the hardest part of launching such funds was finding a custodian as although marijuana production is legal in several states, it is not legal at federal level. Many banks were hesitant to be associated with such products.
Canada last year became the second country in the world, after Uruguay, to legalise recreational cannabis use. Ten US states and Washington DC have legalised the drug for recreational use and 32 for medical use. In December, the US passed a Bill that legalised hemp and allowed growers to qualify for crop insurance and research grants.
Rollercoaster ride
Cannabis ETFs, which track indices of companies with significant activity in the marijuana industry, have had a rollercoaster ride.
For the Horizons fund, a $10,000 (€8,790) investment made at its launch in May 2017 was worth $25,750 (€22,630) at the end of last September but dropped to $15,494 (€3,620) at the end of December. The fund has since returned 52 per cent.
“When we launched the fund we had no expectation of how big it would get,” said Steve Hawkins, chief executive of Horizons ETFs. “I would probably have priced it higher if I had known how big it would be.”
He said the ETF’s investee companies were in demand from short sellers and Horizons generated up to 10 per cent of the ETF’s yield by stock lending. He said this revenue was distributed to investors.
– Copyright The Financial Times Limited 2019
