Should You Invest in the HMMJ ETF Right Now?

The HMMJ ETF has a diversified portfolio of pot stocks, which will help you build long-term wealth in the upcoming decade.

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Investing in growth sectors always remains an attractive proposition for investors. The trillion-dollar tech giants such as Apple, Amazon, Alphabet, and Microsoft have managed to increase wealth exponentially in the last two decades.

The opportunity to crush the broader market returns with growth stocks means investors are always on the lookout for companies that can help them reach financial goals or even accelerate retirement plans.

Many Canadians were hoping cannabis stocks would generate exponential returns, especially since Canada legalized marijuana for recreational use. However, pot stocks have instead been one of the worst performers over the last two years.

While marijuana companies were significantly overvalued when marijuana was legalized in October 2018, they have since been hurt by a slew of structural issues that include dwindling profit margins, a thriving black market, lower demand, and, most recently, the COVID-19 pandemic.

Alternatively, the marijuana industry is still at a nascent stage and is expected to grow at a rapid pace in the upcoming decade. Canada’s licensed producers are well poised to benefit from the expected pot legalization laws in the U.S., Latin America, and Europe.

But it is difficult to identify a winner in a space that has become increasingly crowded. Instead of investing in individual stocks, you can look to park your funds in cannabis ETFs such as the Horizons Life Sciences Index ETF (TSX:HMMJ).

The HMMJ ETF is down 75% from record highs

ETF investing is a great way to diversify your risk as they provide a basket of stocks for you to invest in. The HMMJ is one of the top marijuana ETFs and is trading at $6.43, which is 75% below its record high.

The overall weakness in the cannabis sector has resulted in an elongated bear market, which has weighed heavily on HMMJ as well. As of October 2, 2020, the top five holdings of HMMJ include Innovative Industrial Properties (NYSE:IIPR), Canopy Growth, GW Pharmaceuticals, Aphria, and Cronos Group, which account for a cumulative 63% of the fund.

We can see that the ETF has a good mix of traditional licensed producers as well as ancillary pot companies and medical marijuana players that provide you access to multiple verticals in the marijuana sector.

IIPR is a marijuana-focused real estate investment trust that is trading at US$130 and has gained 75% year to date. While cannabis companies are struggling to remain profitable, IIPR generates a steady stream of cash flow to have a forward dividend yield of 3.6%.

In the last three years, the company has increased its dividend yield by a hefty 368%, and its focus on acquisitions will help support future dividend increases as well. IIPRs client base includes large medical marijuana players such as Trulieve Cannabis and Cresco Labs.

The company has increased sales from US$6.42 million in 2017 to US$45 million in 2019. Analysts tracking the company expect sales to increase by 147% in 2020 to $110 million and by 76.3% to $194 million in 2021.

We can see why this ancillary marijuana company is the largest holding of the HMMF ETF.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. Tom Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Innovative Industrial Properties, and Microsoft and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2021 $85 calls on Microsoft. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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