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Marijuana Goes Mainstream?

A look at the new marijuana ETF and what role it might play in a diversified portfolio.

Today the Tierra XP Latin America Real Estate ETF (LARE) switched to the ETFMG Alternative Harvest ETF (MJX). If you haven't heard by now, MJX focuses on "event driven news and long-term trends in the cannabis industry as well as the industries likely to be influenced by the medicinal and recreational cannabis legalization initiatives" globally. It's a marijuana ETF.

I've spent a lot of time trying to learn about the medicinal potential of marijuana (take it easy, I haven't smoked any since the 1980's and even then very infrequently) as well as CBD oil (doesn't make you high, it doesn't have THC). We have used CBD oil for our dogs for seizures and anxiety and it worked right away. The list of maladies for which marijuana and CBD have shown promise is astounding ranging from the aforementioned anxiety through to very serious things related to cancer. I am not an expert but am an eager student. You should be too regardless of what you think of the investment merits (maybe it's not right for you) but the life merits are hard to dispute and it has barely even started as an investment theme.

If you're interested, go learn about it but I'm not going to try convince anyone of the promise here it is a determination to make on your own but I am sold on the theme.

As for MJX, this has been a developing situation that I have watched play out in a couple of articles as well as on Twitter. Meb Faber, whose company also has a related fund somewhere in the listing process, has talked about custody issues because of the unusual situation of marijuana being legal to varying degrees in some states but not being legal federally. By custody issues he means the banks that actually house the assets (similar to the brokerage firm that houses your assets) are trying to ascertain whether it is legal for them to hold marijuana pure plays or mostly pure plays.

TD Ameritrade shows MJX having traded 277,000 shares which I take to mean that ETFMG addressed the issue if it existed for them and figured out how to resolve it. I will be paying attention to that aspect closely in case there turns out to be news on this front.

To the fund itself. Typically when I profile a narrow based ETF I include what sector it should be considered as. While this may seem obvious most of the time it is a good reminder to watch sector weightings. Whenever the first blockchain ETF comes along I am sure I will add in that it should be considered part of an allocation to the tech sector. MJX says it allocates 50% to healthcare and 31% to consumer staples but I don't necessarily think it will be a great proxy for healthcare and certainly not consumer staples in the way most investors think of staples.

Just as you wouldn't by the ALPS Medical Breakthroughs ETF (SBIO) with very few names you've probably heard of as a proxy for Merck (MRK) or client holding Johnson & Johnson (JNJ), MJX won't be a proxy for that type of healthcare either so it is unlikely to look like many health related funds. SBIO appears to have a little bit of thematic overlap with MJX by the way. Also where investors typically think of staples as low vol, high yielding, defensive holdings, none of those adjectives will be relevant for MJX anytime soon.

The Horizons Marijuana Life Sciences Index Fund trades in Canada under symbol HMMJ, it started trading in April, has many of the same holdings as MJX albeit in different weightings and shows the following performance versus the S&P 500 and the Healthcare Sector SPDR (XLV);

I think this might help set expectations for volatility. It had some decent sized drawdowns during the year. Thinking a fund like this could out outperform on the way up and go down more on the way down is likely a reasonable expectation as the theme makes it's way to being more mainstream. There is obvious political risk. Where it is a new industry there are likely to be big failures on the way to maturity.

This is not as risky as bitcoin, nor is it likely to be anywhere near as volatile as bitcoin. I think of this, similar what I started saying about infrastructure investing many years ago, it is clear to me that this is going to happen (marijuana and CBD being used to help an increasing number of people) which creates a tailwind for the stocks involved but that doesn't mean they have to go up but investing with tailwinds is something I look for.

This is something that will play out over a long period of time, I will be a buyer of theme at some point, if not this fund, I would like to better understand the custody issue or maybe more correctly, understand if there is no issue. If I buy MJX or any subsequent competing funds I will share it here.

This is not as risky as bitcoin, nor is it likely to be anywhere near as volatile as bitcoin.

Agreed

"nor is it likely to be anywhere near as volatile as bitcoin." other than other cryptos, I don't know if anything could be as volatile as bitcoin