There’s huge long-term upside potential with Canadian marijuana stocks, but with astronomical upside comes a potential downside of a similar magnitude. Marijuana stocks are still speculative bets, and if you’re not comfortable with volatility, then you probably shouldn’t get involved with the Canadian green rush to begin with.
If you understand the risks and you want to get in on the action, then picking your own pot stocks can be a daunting task, especially considering most marijuana stocks are either still trading on the TSXV or haven’t even been on the TSX for more than a year. The industry is also unlike anything we’ve seen before, so cannabis investors will be venturing into the unknown.
Once legalization day arrives in Canada, it’s likely that we’ll see a tonne of new companies go public on the TSXV and that will eventually graduate to the TSX. The competition will be fierce and volatility will likely be off the charts, so where does the average Canadian investor even begin?
Fortunately, there’s an ETF for that! The Horizons Marijuana Life Sciences Idx ETF (TSX:HMMJ) eliminates single-stock risk and provides exposure to not just Canadian marijuana producers like Aurora Cannabis Inc. (TSX:ACB), Canopy Growth Corp. (TSX:WEED), and Aphria Inc. (TSX:APH), but to foreign companies like GW Pharmaceuticals, which is a global leader in developing cannabinoid-based medicines.
It’s the one-stop shop for all things cannabis related. It provides not only geographic diversification, but diversification within the cannabis industry with its exposure to producers, pharmaceuticals, and therapeutics companies. The index has a 0.75% management fee associated with it though, so is it really safer to own HMMJ compared to picking your own Canadian pot stocks? Or is the management fee a small price to pay for the diversification that you’ll receive?
Cannabis stocks are subject to a high degree of headline and political risks, so simply owning one stock can be an extremely risky proposition. Consider Canopy, when it got pummeled by the “tainted cannabis scandal” at the recently acquired Mettrum Ltd. All Canadian pot stocks pulled back on the news, but Canopy took the biggest hit on the chin, as it nearly lost half of its value from peak to trough.
If you owned HMMJ instead of Canopy, then the downfall would have been much milder, but, of course, HMMJ can’t counter all headline or political risks because of the high degree of systematic risk surrounding the entire cannabis industry.
Bottom line
HMMJ is a great way to start if you’re a cannabis investor who wants to cut down on single-stock risk. While owning a diversified ETF may be considered “safer,” it’s important to understand that such an ETF will still be vulnerable to systematic risk, which I believe may be too much to handle for the average investor.
If you’re comfortable with excessive amounts of volatility, and you’re truly in it for the long term, then HMMJ can be an efficient way to get exposure to all things cannabis related.
Stay smart. Stay hungry. Stay Foolish.
