Exploring the "Highs" of Marijuana & Psychedelic ETFs

This syndicated article was originally published by the Canadian ETF Market. The Investing News Network (INN) believes it may be of interest to readers; however, INN does not guarantee the accuracy or thoroughness of the information reported by external contributors. The opinions expressed by external contributors do not reflect the opinions of INN and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

There’s a thematic ETF for literally everything investors can dream of today. Uranium? Yeap, it exists. Water? Got you covered. Cows and other livestock? It’s literally in the name of the ETF. If you have an investment idea, I’m sure you can find the right ETF for it using the NEO ETF Screener.

A particularly interesting idea that’s been seeing increased inflows to related funds recently was investing in drugs – not traditional pharmaceutical companies like Pfizer or Moderna, but rather up-and-coming small and mid-caps in the marijuana and psychedelics industries.

While investors may have missed the “Weed Stock Craze of 2018” and the “2021 Shroom Boom”, there is no shortage of potential catalysts on the horizon, most notably continued decriminalization, medical legalization, and therapeutic applications. Let’s explore these ETFs further with some picks from Horizons ETFs.

Investing in Marijuana

One of the largest risks of investing in a single publicly traded company is an idiosyncratic risk – in this case, the possibility of the company missing out on earnings consistently or going bankrupt altogether. This is particularly acute for marijuana companies, which generally have experienced poor growth, missed earnings multiple times, and tend not to have the best balance sheets.

This risk can be significantly reduced (but not eliminated) by investing in a portfolio of marijuana companies. While this portfolio will still be subject to industry-specific risk and market risk (which is unavoidable), the chances of a single stock tanking or getting delisted will have a far more muted effect.

The Horizons Marijuana Life Sciences Index ETF (HMMJ) does this via a passive approach by tracking the North American Marijuana Index, which primarily holds companies that derive some portion of their revenue from the U.S. medical and recreational cannabis industry (where cannabis is legal in some states, but illegal federally). HMMJ also invests in Canadian companies that are involved in recreational cannabis production, which has been legal since October 2018.

The actual performance of the ETF has been poor, but through no fault of Horizons. The bursting of the weed stock bubble in 2018 after the fund debuted on April 4th, 2017, followed by the COVID-19 crash and then the rising interest rate, the inflationary environment of 2022 hasn’t been the kindest to HMMJ. As of writing (August 11), HMMJ is down 13.18% since inception and -42.99% year to date. That being said, any ETF comprised…