Sector ETFs Provide Diversified Entry Point for Fast-Moving Industries

CannabisNewsWire Editorial Coverage: Individuals hoping to gain exposure to the movement of the markets have two primary options: spend a lot of time and effort researching public companies, or put faith into a fund. A solid investment strategy is key to keeping pace with inflation and reaching your financial goals, but the significant risk and volatility that can come with investing in a small group of companies is a real turn-off for most part-time investors.

Increasingly, novices and seasoned traders alike are turning to mutual funds for their stability and ease of use. According to data from the Investment Company Institute, mutual funds were the most common type of investment company owned in 2018, with 44.8 percent of U.S. households owning shares of mutual funds or similar U.S.-registered investment companies – including exchange-traded funds (ETFs), closed-end funds and unit investment trusts. As Matthew P. Fink notes in The Rise of Mutual Funds: An Insider’s View, “Today U.S. mutual funds are the largest financial industry in the world, with over 88 million shareholders and over $11 trillion in assets.”

Index vs Actively Managed Funds

Deciding on a mutual fund can be tricky. Data from Morningstar, published in 2018, indicates that the number of mutual funds and ETFs now stands at more than 10,000. You can begin to narrow this total down by exploring the differences between index funds and actively managed funds.

Index funds aim to track the performance of a specific market benchmark as closely as possible. The Vanguard 500 Index Fund is a prime example, with its holdings consisting of weighted positions in S&P 500 companies. Although investment firm Vanguard suggest that “only about 16 percent” of investments in domestic mutual funds are in index-based options, these funds have some noteworthy proponents.

In 2007, American business magnate Warren Buffett made a $1 million bet with Protégé Partners claiming that hedge funds wouldn’t outperform an S&P index fund, and he won. As reported by CNBC, Buffett’s choice investment, the Vanguard 500 Index Fund, “returned 7.1 percent compounded annually, while the basket of hedge funds his competitor chose returned an average of only 2.2 percent.”

Unlike index funds, actively managed funds rely on the skill and insight of their managers to not just match the performance of the larger markets, but beat them. History shows these funds to be considerably less consistent than their index-focused counterparts. According to Standard & Poor’s, roughly three-quarters of actively managed domestic stock funds underperformed the S&P 1500 Total Market Index in the decade ended June 30, 2015. Additionally, 40 percent of actively managed equity funds available to investors on June 30, 2005, were no longer in existence just 10 years later.

While exceptions do exist (Fidelity Blue Chip Growth has outperformed the S&P 500 by 2.8 percent over the past decade, for example), the upside and relative stability of index funds make them worthy of consideration for risk-averse investors.

Alternative Indexes

The upside of major indexes like the S&P 500 are apparent, but investing solely in the performance of the larger market can limit your exposure to faster-moving investment opportunities. Consider, for example, the cannabis industry. According to Marijuana Business Daily, legal cannabis sales in the U.S. alone were on pace to grow by nearly 50 percent in 2018 to $9.7 billion, with legal sales expected to rocket past $22 billion by 2022.

The Prime Alternative Harvest Index (“Prime”) gives fund-focused investors an opportunity to cash-in on the expanding repeal of cannabis prohibition without digging through the mountain of fly-by-night entries to the space. The Prime aims to take advantage of both 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 that are taking shape in many forms around the globe. Utilizing a modified market cap weighting scheme, the index features some of the fledgling cannabis industry’s most recognizable names, including GW Pharmaceuticals (NASDAQ: GWPH), Cronos Group (NASDAQ: CRON) (TSX: CRON) and The Green Organic Dutchman Holdings Ltd. (TSX: TGOD) (OTCQX: TGODF), alongside a roster of established upstarts and ancillary companies defined by a set prospectus.

The Benefit of Exchange-Traded Funds

When investing in a fund based on a more fluid index like the Prime, the benefits of exchange-traded funds over more traditional mutual funds are particularly noteworthy. While traditional open-end mutual fund shares are only traded once per day, limiting your ability to capitalize on sudden market moves, ETFs are bought and sold during the day just like stocks, opening the door for short selling, futures and options.

ETFMG Alternative Harvest (ARCA: MJ) is an ETF that tracks the Prime in an effort to “measure the performance of companies within the cannabis ecosystem benefitting from global medicinal and recreational legalization initiatives.” To date, it is the first and only U.S. ETF to target the cannabis industry, providing direct exposure to the ongoing “green rush” taking place across North America and around the world.

The Alternative Harvest ETF turned its focus to the cannabis space in late 2017, shifting away from a prior basis of Latin American real estate to invest in both cannabis cultivation firms and a few outside operators that you may not expect to see in a cannabis-centric fund, such as Philip Morris International (NYSE: PM) and Scotts Miracle-Gro (NYSE: SMG).

Importantly, the ETF requires that all holdings have a minimum market cap of $200 million, giving investors a degree of insulation from the marijuana penny stocks and upstart companies that continue to flood the sector.

A Closer Look at the Alternative Harvest ETF

Since rebalancing its holdings to focus on the cannabis space, the Alternative Harvest ETF has established a strong position on the radars of investors eying the industry. In early January 2018, The Motley Fool issued a report stating that MJ was bought and sold more than the $145 billion iShares Core S&P 500 ETF, which the publication touted as a testament to “just how big [MJ] has become in marijuana stock circles.” In the year-plus since that report was issued, interest in the cannabis-focused ETF has remained strong, with current average trading volume exceeding 900,000.

Throughout the first two months of 2019, the sustained interest in MJ has been supported by its upward trajectory. Entering the year with a market price of $26.42, the fund’s YTD return clocks in north of 40 percent, with a market price of $37.43 during mid-day trading on March 5 that marked a new high for 2019.

This strong performance lines up nicely with the broader cannabis sector, which is supported by MJ’s current asset holdings. Canadian shares of The Green Organic Dutchman, for example, which currently represent 4.34 percent of MJ’s portfolio, are up more than 60 percent YTD. Similarly, U.S.-listed shares of Canopy Growth Corporation (TSX: WEED) (NYSE: CGC), which make up 7.16 percent of MJ’s current holdings, are up roughly 63 percent YTD. Canadian shares of OrganiGram Holdings Inc. (TSX.V: OGI) (OTCQX: OGRMF) make up 3.35 percent of MJ’s current holdings, and they’re up more than 60 percent YTD, as well.

The impressive YTD performance of MJ’s smaller holdings, including The Supreme Cannabis Company Inc. (TSX: FIRE) (OTCQX: SPRWF), Canopy Rivers Inc. (TSX.V: RIV) (OTC: CNPOF) and VIVO Cannabis Inc. (TSX.V: VIVO) (OTC: VVCIF), each of which makes up less than 1 percent of MJ’s current portfolio, continues to highlight the current opportunity presented by the North American cannabis industry. The Canadian shares of each of these companies are up more than 40 percent YTD.

After a turbulent 2018 for the cannabis industry, the first quarter of 2019 has shown incredible promise for established operators throughout the space. In early January, The Motley Fool forecast huge growth for a number of companies currently included on the Prime Alternative Harvest Index and held by MJ, including 407 percent sales growth for Aphria (NYSE: APHA) (TSX: APHA), 440 percent sales growth for The Supreme Cannabis Company, 891 percent sales growth for OrganiGram Holdings and 930 percent sales growth for cannabinoid drug maker GW Pharmaceuticals, whose shares currently represent 9.1 percent of MJ’s total holdings.

A Diversified Entry Point

It’s easy to be drawn to the cannabis sector for its promise of significant growth in the coming years, particularly as legalization measures continue to gain steam in the United States. However, choosing a winner in this nascent market has already proven to be both difficult and risky for investors of all skill levels. A proven way to avoid backing the wrong horse in this great green race is to diversify your investment, focusing more on the overall success of the industry than on that of any individual company or management team.

With more than 86 percent of its current holdings providing exposure to U.S. and Canadian markets and broad industry focuses spanning pharmaceuticals, tobacco and biotechnology, the Alternative Harvest ETF provides an intriguing and diversified entry point for investors seeking a foothold in the continued emergence of the legal cannabis industry.

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Cannabis Cultivators Profit from Growing Legal Market

CannabisNewsWire Editorial Coverage: The growth the legal cannabis market has created has turned cultivation facilities into invaluable assets.

The cannabis market is predicted to generate $146 billion in revenues by 2025.
Legal changes are accelerating this expansion in the United States and beyond.
Cultivation facilities are fundamental to this growth, providing the raw materials for the cannabis industry.

Cannabis Strategic Ventures (OTC: NUGS) (NUGS Profile) recently announced plans to establish a multi-acre cultivation facility in California to meet market demands. Tilray Inc. (NASDAQ: TLRY) is increasing its cultivation space through the acquisition of Natura Naturals Holdings. In addition, the need to equip cultivation facilities is fueling growth for hydroponic suppliers such as GrowGeneration Corp. (OTCQX: GRWG). Aurora Cannabis Inc. (NYSE: ACB) (TSX: ACB) has issued a letter of intent to acquire Whistler in an effort to increase cultivation. Meanwhile, Canopy Growth Corp. (NYSE: CGC) (TSX: WEED) is looking beyond North America, cultivating new markets in Europe.

To view an infographic of this editorial, click here.

Cannabis Cultivation Provides Prime Opportunity

The continuing growth of the cannabis industry has created a powerful investment opportunity around cultivation sites. These farms are the bedrock of the industry, producing the raw materials that are essential to both medical and recreational customers around the world. Given the balance of supply and demand, companies with cultivation sites can practically guarantee themselves a market for their product.

One of the reasons behind the high value of these sites is the continuing development of cannabis-friendly regulations. State and federal laws becoming more cannabis friendly, and as that happens, the industry appears destined for substantial growth.

Potential of the Cannabis Cultivation Market

The growth of the cannabis sector has led to the rise of companies such as Cannabis Strategic Ventures (OTC: NUGS), a holding company for cannabis industry start-ups and growth-stage enterprises that is moving into cannabis cultivation in Northern California. Such companies are keen to talk up the potential of the cannabis market, and unlike some other sectors, cannabis shows every sign of living up to the hype.

The global market for legal marijuana was valued at $9.3 billion dollars in 2016. By the end of 2025, the market is forecast to reach $146.4 billion. That’s staggering growth for an industry that didn’t even exist legally a mere 20 years ago and that has only recently started to attract substantial investor attention.

The largest part of the market is currently medical cannabis and cannabis-derived wellness products. Medical use provided cannabis with its foot in the door of the legal economy, thanks to its applications in providing pain and nausea relief, but the potential has exploded from there. Legalization has allowed better research into the effects of cannabis’ active ingredients, in particular tetrahydrocannabinol (THC) and cannabidiol (CBD). The plant is used in a wide variety of health and wellness products tailored to increasingly specific customer bases, such as Cannabis Strategic Ventures’ Fitamins brand, formulated to relieve muscle pain in athletes.

The breakthrough research is driving demand for cannabis in various forms. The plant itself can be preserved and smoked for medical and recreational effects. Plant derivatives are used in a wide range of pills and ointments. And CBD and THC oils can be vaped or used in even more products.

As it becomes easier for companies to legally process cannabis, these companies are exploring making cannabis edibles. The changes are even fostering a surge in the production of hemp, a variety of the cannabis plant that doesn’t contain high-inducing quantities of THC. And in addition to being used in the manufacture of CBD products, hemp is also used to make textile products.

Legal Changes for Cannabis

The societal clamor for access to cannabis’ derivative benefits is driving new waves of legislation, including the legalization of recreational cannabis in several U.S. states as well as countries such as Uruguay and Canada. Across the United States, 70 to 75 percent of the cannabis trade is reportedly still in the hands of criminals, while in states with legalization, only about 30 percent of the activity continues to be criminal, according to Grand View Research. The potential to reduce the income of criminals, increase tax revenue and tackle drug abuse through public health measures are all fueling a movement that could drive even more radical growth in the legal cannabis market over the next generation.

The wave of cannabis-friendly legislation has allowed companies such as Cannabis Strategic Ventures to get their businesses started and access a broad legal customer base. Other legislation has maintained a lower profile but is equally important for the industry. In December, the 2018 Farm Bill belatedly passed through Congress after months of negotiations. In the process, it lifted the ban on commercial hemp, making it far easier for cultivators to produce this form of cannabis.

Even in states where the cannabis industry is already legal, legislation is becoming friendlier towards the industry. The California legislature has proposed a temporary reduction in taxes for cannabis businesses to help them make inroads into the illegal industry. For California-based companies such as Cannabis Strategic Ventures, this is great news as it frees up capital for further expansion and provides the incentive to continue operating in a friendly state.

More Cultivation

Under the circumstances, venturing into production was a natural move for Cannabis Strategic Ventures. With the industry growing and the legal landscape looking friendlier than ever, the company is preparing to break ground on a major new cannabis cultivation site.

The six-acre site in Northern California — dubbed the NUGS Farm — will establish the company as a direct producer and position it to make the most of the potential the market has to offer.

“Establishing the NUGS Farm and securing these licenses are significant milestones for Cannabis Strategic Ventures,” said Simon Yu, CEO of Cannabis Strategic Ventures. “As the cannabis industry expands, and as we work to make cannabis legal on a federal level, Cannabis Strategic Ventures will be in position to touch on all areas of cannabis production.”

Though the main purpose of the farm will be to cater to Californian cannabis users, the largest market for the plant in the United States, the move is also a significant step toward wider operations.

“They say that the way California goes, the direction of the country goes,” added Yu. “We are optimistic that federal regulations will become more cannabis friendly in the near future and are excited for the positive impact it can have on our company.”

With more than 20 licenses for the cultivation, manufacturing and distribution of cannabis within California, Cannabis Strategic Ventures appears to be perfectly positioned to leverage opportunities within the state. In addition, these strategic moves may ideally prepare the company for expansion prospects throughout the rest of the country.

The Rise of the Cannabis Companies

The changing cannabis landscape has led to the emergence of several major players in the industry.

Many of the most important companies are based in Canada, where federal-level legalization and a large market for cannabis have made it easier for businesses to develop. Tilray Inc. (NASDAQ: TLRY) is one of the industry leaders, a pioneer in the cultivation, production and distribution of cannabis and its derivatives. With affiliates and subsidiaries in Europe, Australia, New Zealand and most recently Latin America through Tilray Latin America SpA, the company is developing a global presence. It is also expanding within Canada and has recently announced a pending acquisition of Natura Natural Holdings Inc., a multimillion deal that will give Tilray an extra 662,000 square feet of growing space.

The rise of cannabis companies is proving a boon for the suppliers of cultivation equipment as well, especially those specializing in hydroponics. Among those to profit is GrowGeneration Corp. (OTCQX: GRWG), a seller of hydroponic systems and the associated nutrients. Like Tilray, GrowGeneration has developed enough financial power to use acquisition as a route to growth. It recently obtained all the assets of Denver-based Chlorophyll Inc., increasing its influence across the United States.

Another of the big Canadian companies, Aurora Cannabis Inc. (NYSE: ACB) (TSX: ACB), has also demonstrated the importance of increasing cultivation space. A large part of the rationale behind its recently announced letter of intent to acquire Whistler was the desire to get hold of that company’s two production facilities. These facilities are expected to produce 5,000 kilograms of quality cannabis a year, providing Aurora an avenue to increase its market share.

Canopy Growth Corp. (NYSE: CGC) (TSX: WEED) is looking beyond its immediate market. Though legalization is not as widespread in Europe as in North America, change is also expected there in the long term, and the company is positioning itself to make the most of this. It has established subsidiaries in the United Kingdom and Poland to make the most of the very different situations in those two countries. In Poland, the company has passed through a regulatory process that will allow it to import and sell its cannabis in the country for medical use. In the United Kingdom, where the door has only just opened a crack to the use of cannabis derivatives in the most extreme medical cases, the company has formed a joint venture with a local research group, placing Canopy Growth as one of the first cannabis companies operating in the United Kingdom.

The market for cannabis is expanding as attitudes and laws change. This momentum may drive a need for more product and thereby provide promising opportunities for companies with cultivation facilities.

For more information on Cannabis Strategic Ventures, visit Cannabis Strategic Ventures, Inc. (NUGS)