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If You’re Going to Buy Weed, Buy It in Aggregate

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If you haven’t noticed, Canadian cannabis producers are risky to own. The same volatility that allowed these companies to double on a weekly basis has allowed some of the same names to halve a weekly basis.

Here’s my take on why investors looking to invest in cannabis ought to buy the Exchange-Traded Fund (ETF) tracking the sector: the Horizons Marijuana Life Sciences ETF (TSX:HMMJ) rather than buying and selling individual companies at any point in time.

While Canada’s cannabis producers do tend to move in the same direction together, it’s clear that some companies like Canopy Growth Corp have done a heck of a lot better than Aurora Cannabis. There are multiple reasons for this.

Each cannabis producer has different exposure to geographical markets, market segments (medical vs. recreational), consumer types/demographics (urban/affluent, rural/traditional), etc.

These factors create idiosyncratic risk unique to each producer and also create opportunity for outperformance if you make the right bet.

Why consider Horizons Marijuana Life Sciences ETF?

Similar to any other sector or index with a wide range of options with differing market capitalization and risk profiles, buying an ETF that tracks the sector allows for a smoothing out of returns across a large number of companies.

For highly volatile sectors like the Canadian cannabis space, anything anyone can do to limit volatility is worthwhile, in my opinion. From a long-term perspective, putting a small allocation of one’s portfolio into something less volatile like HMMJ is a much better play for many reasons.

Diversification is key for any portfolio. When you think about highly volatile, extremely risky investments like cannabis, it’s much better to bucket them together before throwing your funny money at these companies because you don’t want to lose it all in one place.

Bottom line

Personally, I still wouldn’t touch the cannabis sector with a 10,000 foot pole for many reasons – among them is the heartburn I would get from seeing a position go up 5% on a Monday and lose 12% on a Tuesday.

This is the start of a typical week in the cannabis sector, and it’s just not for me. For those with higher risk/volatility tolerance, and who believe cannabis companies are somehow “cheap” at these levels, go for it. I’ll be on the sidelines cheering for you.

Stay Foolish, my friends.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald does not have ownership in any stocks mentioned in this article.

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