Cannabis ETF Launches as Volume Diminishes: Part 1

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The medical cannabis market in Canada continues to grab headlines after the country announced plans to legalize recreational cannabis on a national level before July 1, 2018.

This opportunity has created ample opportunities for everyone. From funds to companies, the Canadian legal cannabis market continues to report significant developments.

In April, Horizons ETFs Management launched the first medical cannabis focused exchange traded fund (ETF) called the Horizons Medical Marijuana Life Sciences ETF. The fund trades under the symbol HMMJ on the Toronto Stock Exchange. Although the fund has generated incredible interest, it has not lived up to expectations so far and HMMJ is down 4.1% since it started trading

Passively Managed ETF Doesn’t Work for Cannabis Stocks

Although the Medical Marijuana Life Sciences ETF is designed to be a liquid and investable index of publicly listed companies focused on the cannabis industry, it is not designed to handle volatile periods like the one we have experienced over the last month.

HMMJ is an index (or passively managed) ETF, designed to provide exposure to a basket of North American publicly traded companies with significant business activities in the cannabis industry.

For this reason, we think the ETF may have launched at the complete wrong time. HMMJ started trading right before legislation was tabled by the Canadian federal government. The Canadian cannabis market rallied into this event, but has since pulled back and is look for a bottom.

Don’t End Up in a Liquidity Trap

When it comes to Canadian medical cannabis producers, we are very focused on the recent decrease in trading volume. Across the board (from Aurora to Canopy, from Aphria to Emblem), trading volume has decreased significantly and this is one of the most important metrics to follow.

Trading volume has an immediate impact on a stock’s spread (difference between the buy and sell price) and we continue to closely monitor how this trend continues. If this weak volume trend continues, we expect to see HMMJ trade lower and continue to prefer investing in individual companies at this time.

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