New Junior Marijuana ETF Offers Exposure To U.S. Businesses

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A Canadian firm is launching an exchange-traded fund that gives investors exposure to the U.S. recreational marijuana market — a sector that’s been largely avoided by other ETFs because of legal uncertainties.

Horizons ETFs Management Canada Inc. has filed a preliminary prospectus to launch the Junior Marijuana Growers Index ETF, which includes companies with operations in the U.S. This is in contrast to Horizons’s existing Marijuana Life Sciences Index ETF, which avoids U.S. growers and focuses on larger companies with ancillary exposure like Scotts Miracle-Gro Co.

The new ETF will be listed on Canada’s Aequitas NEO Exchange instead of the Toronto Stock Exchange, where Horizons’s other marijuana ETF trades. That’s because the TSX has said it may delist marijuana stocks which run afoul of U.S. federal law.

While pot is legal in several U.S. states including California and Colorado, it’s illegal federally. Canada plans to legalize it across the country this summer. This discrepancy has created a valuation gap between pot stocks with Canadian operations and those with U.S. businesses, and prompted more companies with U.S. assets to list north of the border on exchanges like NEO and the Canadian Securities Exchange.

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Companies with U.S. operations that could benefit from inclusion in the new ETF include CannaRoyalty Corp., iAnthus Capital Holdings Inc., MPX Bioceutical Corp., Marapharm Ventures Inc., Friday Night Inc. and Sunniva Inc., according to Beacon Securities analyst Vahan Ajamian.

“The next month would be a good time to start acquiring shares of U.S. operators and smaller Canadian cannabis companies,” Ajamian wrote in a note published Thursday. “Should it go forward as planned, share prices and liquidity of U.S. operators could be disproportionately impacted by the new buying power of an ETF.”

The two existing marijuana exchange-traded funds — Horizons’s and the U.S.-traded ETFMG Alternative Harvest ETF — have captivated investors. Horizons’s Life Sciences ETF attracted C$126 million ($100 million) of inflows in the first week of 2018, the most of any Canadian fund over that period, according to National Bank Financial. It now has assets of C$773 million.

Alternative Harvest saw its assets swell from $5.7 million on Dec. 26, its first trading day, to $355 million on Thursday. That ETF holds more than half its assets in Canada, with top holdings including Canopy Growth Corp. The BI Global Cannabis Competitive Peers Index has nearly tripled since Nov. 1.

“With the change in the capital markets, the growth of the cannabis sector generally, it’s opened the door for us to be able to create an ETF that is much more specialized for marijuana growers,” Steve Hawkins, co-chief executive officer of Horizons, said in a phone interview.

“This is going to be a higher-risk product,” said Hawkins. “It’s going to be significantly more volatile in our estimation.”