Where Do the Pathways Lead for Cannabis Investment?
By Dan Ahrens, chief operating officer of AdvisorShares and portfolio manager of the AdvisorShares Vice ETF (Ticker: ACT)
Recently, an ETF provider in Canada launched a narrow-based ETF that tracks emerging companies that grow marijuana. The same company previously launched an ETF that invests in more “mature” cannabis-oriented companies, which has been very successful in terms of AUM growth. At AdvisorShares, we are big believers in where this emerging trend is going in terms of an end result helping people with a myriad of physical ailments and more serious medical conditions. However, the wrong investment path to that end result could end very badly for investors depending on how they choose to participate in the theme.
In previous articles and interviews we have stressed the idea of accessing the cannabis investment theme via U.S. federally legal means. The disconnect is that marijuana use and possession remains not legal at a federal level—and only allowed under select circumstances at the state level for certain states and the District of Columbia. While societal and regulatory landscapes have evolved, the path to federal legality stands unclear. Paraphrasing Joseph Schumpeter, there could be quite a bit of legal destruction along the way, which could adversely affect the microcap stocks that populate the narrow-based ETFs trading currently.
There is a parallel to investing in solar stocks in that while many people believe in solar power as being able to solve a lot of problems, it remains an extremely volatile space to invest in. Solar has had the historical tendency to correlate to oil stocks, which may be surprising to some folks – but with much more volatility than the typical energy sector ETF. That volatility may not be suitable for the typical advisory client. Owning a microcap-oriented cannabis-themed ETF could take on a similar volatility, which also may not be suitable for the typical advisory client.
Much of our commentary on the cannabis space has focused on the research being done in the biotech and pharmaceutical industries for medical use. We are also seeing more and more being done in the space by alcohol and tobacco companies for potential recreational use of marijuana as this aspect of consumption continues to evolve. It is a logical extension of their businesses as long-term, negative health consequences from non-medical use appears limited.
Where this is a nascent industry for investment, for larger alcohol and tobacco companies this line of business can potentially grow into a significant source of revenue and earnings with possibly relatively little upfront expenses if cannabis use and possession ever becomes federally legal. If federal legalization does not happen, then many of the alcohol and tobacco companies simply continue to be, in our opinion, dependable and potentially recession-resistant stocks that can be both very profitable and attractive long term holds. And—we believe that we’ll continue to see increasing overlap and investment into the cannabis industry from big alcohol and tobacco as that space evolves.