on pot stocks and etfs

On Pot, Stocks and ETFs

My visceral reaction to toking will always be feeling like, at best, I’m doing something naughty.  Too, I will always regret that I wasn’t old enough to be one of those “long-haired freaky people” that pushed societal boundaries.  And the stuff we smoked as teens was as tepid as the “Baby Duck” we learned to drink as our go-to for wine (and forever ruined me for champagne).

Long before seeing legislation legalizing recreational pot use, the capital markets have pushed boundaries.  The hefty market capitalization of pure pot plays seems to be predicated solely on an emerging robust market for recreational marijuana.

Horizons Exchange Traded Funds launched their newest ETF this morning, Horizons Medical Marijuana Life Sciences ETF (HMMJ).  Opportunities for humor aside, this launch undoubtedly is an unqualified success.  By 10:15 the ETF had traded over 1,500,000 shares[i]; National Bank Financial was responsible for over 75% of the selling which suggests to me that they were actively creating new units on the heels of running through the seed capital.

In my opinion, Horizon has done four things with HMMJ’s launch today:

  1. Horizons has created a safer play on the whole sector, something that ETF’s traditionally do very well;
  2. By launching the ETF Horizons in some respects sanitizes the somewhat sordid feelings more establishment-minded people have towards pot stocks, otherwise lending a measure of respectability;
  3. The success of the ETF will provide support for stocks that are included in the index and otherwise slowing the growth for a slew of opportunistic promoters;
  4. It provides a relatively inexpensive way for smaller investors to take part in the sector and achieve a measure of diversification.

About two weeks ago, my partner (@lindaodnokon) and I attended a presentation of a recent new and publicly traded medical marijuana entrant.  To be frank, I had already rejected them as a stock that I wanted to invest in.  But like all presentations we attend, we always learn something new such as issues for medicinal prescription and use and splitting the recreational consumer market into a “VQA” segment (what we laughingly called “douchey” pot).  We certainly gained an appreciation that the competitors in the space each have their own approach and only a developing market is going to show us clearly the winners and losers.

Linda applied the same aggressive due diligence to HMMJ.  To their credit, Horizons stepped up and addressed every one of her issues succinctly and directly in a timely fashion.  Her work certainly left me feeling more comfortable about including the ETF in my offerings.  And Horizons’ success means we can offer interested retail clients an offering that removes a great deal of single-issuer risk.

I would like to warn you that ETFs are not suitable for all retail investors and that Linda and I always discuss investments in the context of suitability.

[i] Source:  Datastream 10:15 am 4/5/2017

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This information has been prepared by David Chellew, Portfolio Manager for Industrial Alliance Securities Inc. (IAS) and does not necessarily reflect the opinion of IAS. The opinions expressed are based on an analysis and interpretation dating from the type of publication and are subject to change. Furthermore, they do not constitute an offer or solicitation to buy or sell any the securities mentioned. For more information about IAS, please consult the official website at www.iasecurities.ca. David Chellew can open accounts only in the provinces where he is registered.