Thinking about Investing in Cannabis ETFs?
Cannabis stocks continue to rise since the November election in the United States as more states voted to legalize recreational consumption of cannabis. That vote, and the hope that the federal government is finally going to ease the regulations on cannabis and make it legal for recreational consumption nationwide. Many investors saw the cannabis industry’s recognition as an essential industry during the Covid-19 pandemic as a sign of good things to come for cannabis in Washington DC.
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As a result of the good press that cannabis is getting, many investors are considering adding cannabis stocks to their portfolio this year. There are many well-performing cannabis ETFs that would offer many investors the gains they are looking for in this incredibly volatile cannabis stock market. However, due to the volatility mentioned above, it is necessary to proceed with caution when entering the cannabis stock market. Thinking about investing in cannabis ETFs? We have prepared some essential points to help guide you as you navigate the cannabis ETF markets.
What are Cannabis ETFs?
ETFs, or exchange-traded funds, are funds with a collection of different stocks to minimize the downside risk for investors in the ETF. They usually are designed to track a particular index, like the S&P 500. This means that the ETF will generally behave in the same way as the index it is tracking. If the index goes up, so does the ETF, and vice versa.
While ETFs have been around for decades, the first cannabis ETF wasn’t started till 2017. ‘Horizons ETFs’ was listed on the Toronto Stock Exchange in April of 2017, tracking the North America Medical Marijuana index’s performance. This gave way to a new, less risky way of investing in cannabis stocks, which we want to help you profit from. If you are thinking about investing in cannabis ETFs, there are a few things you must consider.
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Thinking about Investing in Cannabis ETFs? Here are 3 Key Considerations
1. What Index is the ETF Tracking?
This is important to know before investing in an ETF. The index that the ETF is tracking will determine both the upside and downside potential of the ETF. Furthermore, you should know the tracking difference between the ETF and the index it is tracking.
Tracking difference is the difference in performance between the ETF and the index it tracks. This difference is usually caused by the trading and rebalancing costs. The tracking difference can be a good metric for knowing whether an ETF is performing well or not and whether its fees are too high.
2. Actively Managed ETF vs. Passively Managed ETF
Whether a fund is actively managed or not could be the difference between recouping your investment and making a significant loss. Actively managed funds are those that rely on a human trader to decide and execute trades, while passive funds rely on AI and trading bots to make their gains.
While passive funds are better for long-term gains, they aren’t as effective in minimizing losses as active funds are. Passive funds have trading cycles within which the fund’s asset composition cannot be altered, even at the risk of significant losses. Because of this, it is up to you, the trader, to decide where you want to put your money.
3. Percentage of “Junk Stocks”
It is not uncommon for funds with baskets of stocks to include some high performers and many underperformers that are there more for their fundamentals which help to spread out the risk more than they help make any gains. However, that is not to say that the junk assets couldn’t hurt you. Remember the sub-prime mortgage loans that caused the recession in 2008? Those bad loans were mixed in with a few good ones, so investors and insurers both couldn’t tell the difference. You have to know the spread in the ETF between the performers and the junk before investing in it.
Jason Spatafora, the co-founder of marijuanastocks.com, says, “Most of these ETFs will have a certain amount allocated to a number of companies where the top five marijuana stocks are good, but then there is a huge drop off in quality in the other stocks. Everything else is more risky.” This sums up the nature of most ETFs.
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Thinking about Investing in Cannabis ETFs?
About Cannin: Your Cannabis Stocks Resource
Cannin is your #1 resource for cannabis stocks. Our global team of experts evaluates all emerging cannabis stock investing opportunities. We aggregate hundreds of hours of financial research and provide tips on the best cannabis stocks for 2021.
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