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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