Reviewed and Updated On: 6 Jul 2024
Ever wondered about that plant causing a buzz in the financial world? That's cannabis, and investors are flocking to it like bees to a honeycomb.
But before you jump on the bandwagon, let's break down what cannabis is and how you can invest in it through cannabis ETFs.
To start, what is cannabis?
Cannabis refers to a group of three plants within the Cannabinaceae family with psychoactive properties: Cannabis sativa, Cannabis indica, and Cannabis ruderalis.
When the flowers of these plants are harvested and dried, you are left with one of the most common drugs in the world. Some call it weed, some call it pot, and others call it marijuana.
Although cannabis is made up of more than 120 components, which are known as cannabinoids, the two main components are delta-9 tetrahydrocannabinol (THC) and cannabidiol (CBD).
THC is the main psychoactive compound in cannabis, which affects the way your brain perceives the world around it. It acts on the body’s endocannabinoid system and is the cannabinoid responsible for making people feel intoxicated or euphoric. THC is responsible for the “high” that most people associate with cannabis.
CBD does not act on the same neurological pathways. Researchers believe CBD acts instead on the brain’s serotonin system, regulating mood, sleep, appetite, and desire. It may calm and relax you rather than alter your perception. It also does not affect physical reactions as much.
The most common uses for medicinal cannabis include severe or long-term pain, nausea and vomiting due to chemotherapy. It has also been reported that it is useful in treating epilepsy and multiple sclerosis.
There are three primary types of companies in the cannabis industry:
Cannabis growers and retailers: These companies cultivate, harvest, and distribute cannabis to customers. Some also operate retail stores that sell medical/ recreational cannabis.
Cannabis-focused biotechnology companies: These companies participate in the industry by extracting cannabinoids from cannabis to develop new pharmaceutical drugs.
Ancillary product and service providers: These companies support the industry by providing products and services such as hydroponics products, lighting systems, or management services.
The value of the worldwide legal cannabis market is projected to increase and reach $91.5 billion by 2028, according to Grand View Market Research. It is no wonder that many investors want to profit from this tremendous growth.
Instead of buying shares in a single company, cannabis ETFs allow you to invest in a basket of cannabis-related businesses. This reduces your risk because if one company stumbles, the others can help balance things.
There are two main cannabis ETFs to consider:
AdvisorShares Pure US Cannabis ETF (MSOS): This ETF focuses on U.S. companies involved in various aspects of the cannabis industry, like cultivation and retail. Its top holdings include Green Thumb Industries, Trulieve Cannabis, and Curaleaf Holdings.
ETFMG Alternative Harvest ETF (MJ): This ETF casts a wider net, investing in global cannabis companies. Its top holdings include Aurora Cannabis, SNDL Inc, and Canopy Growth.
But even investing in cannabis ETFs comes with considerable industry-related risk.
These are the three main risks that have created a lot of volatility:
Legal and Political Hurdles: Cannabis is still illegal federally in the U.S., making it difficult for cannabis businesses to access financial services. Legalization remains uncertain, which can create instability.
A Fight for Market Share: The cannabis industry is attracting many new players, which can lead to fierce competition. This competition can eat into profits and hurt shareholder returns.
Over-the-Counter Concerns: Many cannabis companies trade on OTC markets, which have less stringent regulations than major stock exchanges. This can make it harder to assess a company's financial health.
Bottom line
Although investing in cannabis ETFs offers potential growth opportunities, you must understand and acknowledge the risks involved. Always do your research, and never invest based on hype.
*This article is not financial advice. It is for educational purposes.
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