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iShares Core S&P/TSX Capped Composite Index Fund Goes up in Smoke

Starting March 20, Canopy Growth Corp. (TSX:WEED) will be a part of the S&P/TSX Composite Index — a huge feather in the cap of Canada’s largest cannabis company.

“Being added to the index is an important accomplishment and a reflection of the work we’ve done to put Canopy Growth top of mind in the investment community,” said Bruce Linton, chairman and CEO. “With international operations, high-profile partnerships, and expansion plans all developing rapidly, being included in the index acts as another layer of credibility investors can point to.” contributor Brian Paradza recently discussed the good and bad of WEED joining the prestigious broad-market index. Understandably, he was able to make a much more convincing argument as to why it’s a good thing for the company. Did he discuss the downside? Not so much, but that’s not his fault.

WEED being added to the index, in my opinion, is an unequivocal home run for the company. Portfolio managers looking for Canadian content will simply buy all 250 or so holdings of the index and call it a day. Before March 20, WEED was on the outside looking in. Now, portfolio managers will have to buy WEED stock to track the benchmark.

It’s an easy way for financial advisors in Canada and elsewhere to get exposure to the explosive growth in the cannabis industry without betting the farm.

WEED shareholders should be ecstatic.

The only question is if this will end up hurting indexers holding ETFs such as iShares Core S&P/TSX Capped Composite Index Fund (TSX:XIC) as a result.

How so, you ask?

Well, any institutional investor that applies faith-based investing to their stock selection is likely not going to be holding XIC and other ETFs or mutual funds tracking the S&P/TSX Composite Index after March 17.

What could happen is that these investors switch their allegiance from the XIC to the iShares S&P/TSX 60 Index Fund (TSX:XIU), which, as far as I know, has a market cap floor at the moment around $2.7 billion — Eldorado Gold Corp. is the smallest weighting in the ETF at 0.18% — excluding WEED for the time being.

But if you recall, WEED had a market cap over $2 billion as recently as November; that’s only a $1.40 increase (12.8%) from where it’s currently trading.

If that happens, BlackRock, Inc. and the other fund companies offering broad-market indices could see a little bit of turbulence over the next few weeks. That said, I’m not suggesting that faith-based investors are going to bring down the index, but it’s something to keep in mind as WEED’s addition plays out.

The other concern indexers might have is the ramifications of the Canadian government reversing its plans to legalize the recreational use of marijuana in this country.

While this would certainly hurt WEED’s revenue plans domestically, it’s got plenty going on in the medical marijuana area to keep it busy for several years. That’s a bit of red herring, in my opinion.

The biggest concern regarding WEED is how quickly it scales to profitable growth. If investors don’t see a light at the end of the tunnel six to 12 months from now, it’s very possible there will be a stampede for the exits by investors.

But that too is a big if.

So, if you currently own the XIC, you don’t have any reason to be worried. Your investment isn’t going to go up in smoke regardless of whether or not Canopy Growth is a bust, and that’s the beauty of diversification.

As for faith-based and sin-free investors, I doubt there are enough of them here in Canada to make an ounce of difference.

However, it will be interesting to watch.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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