ETFs provide easy access to a basket of cannabis stocks, but here’s what you really need to know…
Because more are popping up, I wanted to talk today about exchange-traded funds (ETFs), specifically in the cannabis sector.
An ETF is a fund that owns a basket of stocks, commodities, or bonds. There’s pretty much an ETF for anything that you can think of, ranging from tech ETFs to dividend ETFs.
ETFs are similar to mutual funds because they allow investors to have broad access to a bunch of companies, but there’s a key difference. An ETF differs from a mutual fund in that ETFs can be bought and sold throughout the day, while an investor can only either buy or sell a mutual fund at the end of each day.
And one recent example of a cannabis ETF is the recently launched Pure Cannabis ETF, trading on the NYSE under the symbol “YOLO.”
YOLO is trading for about $25, while one of its holding, Innovative Industrial Properties Inc. (NYSE: IIPR) – which happens to be the only dividend-paying cannabis stock – is trading around $85 per share.
The seemingly cheaper price of an ETF compared to an individual stock is attractive to a lot of retail investors.
But before adding YOLO or another ETF to your portfolio, I’m going to pull back the curtain and show you what’s really going on with this type of investment.
Today, I’m going to talk about the good, the bad, and the ugly of cannabis ETF investing…
Cannabis ETFs 101
There are two kinds of ETFS: passive and active.
With a passive ETF, new stocks are added to a portfolio, usually according to a fixed formula. The advantage of owning this kind of ETF is that the fees are very low.
A passive ETF is fine if it owns stock of companies in a mature sector, like railroads or food manufacturers.
But for the cannabis industry, there is no purpose for a static ETF.
This type of ETF does not adjust to changes in the marketplace, and it can take a long time for a company to be added or removed from the portfolio.
Company A makes a major misstep? Too bad. It might not be removed from the ETF until next quarter. Company B made some great moves and should be in every investor’s portfolio? Again, too bad. It won’t be added until those running the ETF have their next meeting.
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To counter this issue of a lack of timely investing, there are also active ETFs. This is where someone with financial training selects stocks and trades them as he or she sees fit. Of course, you’re going to have to pay a management fee.
The YOLO ETF I mentioned earlier has a management fee of 0.6%.
That isn’t a lot, but one of the biggest disadvantages with owning an ETF is that you are stuck with all of the companies in the portfolio. If you’re particularly excited about CBD companies or companies building a presence in California, you have to go along for the ride with everything else that is in that ETF.
And if you just like certain companies to begin with, you are better off buying individual stocks.
This is a personal belief, but ETFs also limit your investing education and experience. You won’t learn anything from putting your money into a fund and just looking daily, weekly, monthly, or quarterly to see if the price has moved up or down.
The Bottom Line on ETFs
If you want exposure to the cannabis sector, understand the fees involved, and aren’t particularly interested in learning about investing, an active ETF might make more sense than buying individual stocks.
But if you’re interested in the opportunity to beat general market returns and want to become a more educated investor, buying individual stocks is the way to go.
Whether it’s through the information we present in Cannabis Profits Daily, Cannabis Insider’s Report, Cannabis IPO Insider, NICILytics, or through some other resource you’ve found helpful, I hope you are feeling more confident with your cannabis investing skills.
I also hope that, thus far, you’ve been able to cash in on some of the themes we’ve talked about, like when I said back in January that 2019 would be the Year of CBD. I thought that this was so important that I even had my staff put together a free CBD guide.
Most recently, you’ve seen me write a lot about why the Canopy Growth Corp. (NYSE: CGC) acquisition of Acreage Holdings (CSE: ACRG, OTC: ACRGF) is such a big deal. If you missed what’s going on, the acquisition will only close when cannabis is legal in the United States.
I don’t have a crystal ball, but this tells me that full cannabis legalization in the U.S. is going to happen a lot quicker than most people realize. Canopy didn’t make this deal with the expectation of waiting for it to close in 5 or 10 years.
If there’s ever been a time to be a cannabis investor, it is right now.
Executive Director, National Institute for Cannabis Investors
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24 responses to “What You Really Need to Know About Cannabis ETFs”
May 02 2019