Two cannabis ETFs have posted return of over 20%, thanks to increased legalisation momentum in the US.
ETFs tracking cannabis stocks have proven to be one of the big winners from Joe Biden’s US election victory.
On a one month basis, Medical Cannabis and Wellness ETF (LSE: CBDX) has seen a return of roughly 22% (dated to 3 December). This ETF tracks the Solactive Medical Cannabis and Wellness Equity Index, with an ongoing charge of 0.8%.
Meanwhile, Rize Medical Cannabis & Life Sci ETF (LSE: FLWR) saw even better performance, returning just under 27% over the past month. This ETF tracks the Foxberry Medical Cannabis & Life Sciences USD Net Total Return Index for a charge of 0.65%.
The US election was the driving force behind this performance. As Rahul Bhushan, co-founder of Rize ETF notes: “The cannabis industry as a whole has seen a strong rally since Joe Biden won the US presidential election.” He points to vice-president elect Kamala Harris being a sponsor of a key legalisation bill while in the Senate, alongside suggestions that president-elect Joe Biden may soften federal rules surrounding the drug, as fuelling optimism for the sector.
Election day in the US also saw more states vote to liberalise cannabis laws. In the US it is common for states to combine the presidential election with local policy referendums. In five different states, citizens voted for the legalisation of cannabis for either medical or recreational cannabis use.
Nawan Butt, portfolio manager of the Medical Cannabis and Wellness UCITS ETF noted: “The outcome of the US elections is now expected to further increase medical legal jurisdictions in the US for cannabis.”
Butt also says he expects this momentum towards medical cannabis legalisation to extend beyond the US. He says: “There are also developments around the world that illustrate the growing demand for medical cannabis, and how it is becoming more mainstream. This is a very exciting time for the legal medical cannabis industry.” In particular, he points to the growth of medical cannabis use in the Germany, Israel and Australia.
Both Medical Cannabis and Wellness ETF and Rize Medical Cannabis & Life Sci ETF have had a good month, posting returns of above 20%. In contrast, the Vanguard FTSE All-World UCITS ETF GBP (LSE: VWRL) has returned around 8% over the same period of time.
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However, Rize Medical Cannabis & Life Sci ETF has clearly performed better, with returns around four percentage points higher.
This is the result of the different indices these two ETFs use to gain exposure to the cannabis theme, meaning both have fairly different portfolios. The Rize ETF uses the Foxberry Medical Cannabis & Life Sciences index, which at the end of October meant its highest weighting (at 28%) was to a company called GrowGeneration Corp (NASDAQ:GRWG). This stock roughly doubled in price over the course of November. According to Bhushan, it contributed about 60% of ETFs return.
Meanwhile, the biggest holding of Medical Cannabis and Wellness UCITS ETF at the end of October was Arena Pharmaceuticals Inc (NASDAQ:ARNA), accounting for 22% of the portfolio at the of October. Over the course of November that company saw its share price fall of over 20%.
The different fortunes of the largest holdings of the two ETFs is not necessarily indicative of one using a better index. If an investor thought they could know ahead of time that GrowGeneration would perform so well (an unlikely prospect), they would be better suited to investing directly in equities, rather than using ETFs.
Instead, investors use thematic ETFs to gain exposure to a broad theme – and on this basis, both ETFs performed well, giving investors exposure to the broad rally in cannabis related stocks.
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However, it does illustrate the point that different ETFs tracking the same theme can see quite different performance due following indices with different methodologies and therefore different equity weightings.
Is it legal to invest in cannabis?
Cannabis use and possession remains illegal in the UK. However, it is not illegal to invest in companies that are involved in the medical use and sale of cannabis, provided it is in line local laws.
The ETFs mentioned above have been approved by the Financial Conduct Authority and been allowed to list on the London Stock Exchange (LSE), alongside other legal cannabis related investments.
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