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ETF

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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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One of the recent filings from ETF Managers Group describes plans for the firm to start an ETF that will target the medical marijuana and industrial hemp industries. The Emerging AgroSphere ETF is currently in place to become the first of its kind as there have been no other similar ETF filings.

The plan indicates that the fund’s underlying index will follow companies that engage in investigative studies on cannabidiol CBD and cannabis derivatives and synthetics for use in prescription medication and in companies that produce or sell forms of industrial hemp. The index can also involve companies that are linked in the supply chains of the two previously mentioned types of companies.

The document clearly states that the component companies’ involvement with marijuana must be entirely lawful, but it does also note that could change if marijuana usage becomes legal for nonmedical purposes.

The index provider relies on publicly available sources to determine which companies qualify for inclusion in the index. Companies can be selected from U.S. and foreign markets but must meet size and liquidity requirements and be listed in a market that meets investability requirements.

According to the prospectus, the index is rebalanced and reconstituted on a quarterly basis. The filing did not include an expense ratio or ticker, but it did indicate the fund will list on the NYSE Arca.

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