By all accounts, 2019 was a painful year for cannabis equity investors. The sector’s challenges were reflected in the Horizons Marijuana Life Sciences Index ETF (HMMJ), which was down approximately 35% on a year-to-date basis as of December 31, 2019. While more pain may lie ahead, the significant pullback in marijuana equities in the last 12 months has resulted in the dissolution of lesser companies, which should ultimately provide greater opportunity for marijuana stocks that can maintain viable businesses over the next 12 months.

The major concern going into 2019 was the high valuations of Canadian Licensed Producer (LP) stocks. These stocks had the monumental task of meeting high expectations on revenue growth relative to their valuations.

Of course, with a brand new national recreational market, revenue from Canadian LPs did grow exponentially. However, by the end of Q2 2019, it was clear that the pace of growth for LPs was not enough, and the market flipped more towards a hyper-focus on revenue and potential earnings growth.

A sector that had largely been valued on potential was now being valued on fundamentals, and when viewed through that lens, these companies just weren’t attractive because many of them had negative earnings. Unfairly or not, some of the bigger LPs that had stretched their balance sheet into investments outside of Canada were penalized for running higher levels of debt and poor earnings, despite building for longer-term growth.

Overall, recreational sales of cannabis in Canada have been a disappointment due to initial challenges with getting supply to market and poor retail storefront distribution in key markets like Ontario. The cannabis sector also likely has oversupply issues with declining wholesale prices, which has forced LPs to write down the value of their inventory.

Going into 2020, it’s quite likely that we will see some bankruptcies and exits from the sector, as a lot of equity financing for smaller cannabis companies has dried up and revenue from Canadian retail sales simply isn’t there.

Optimism in the cannabis sector

Optimism might sound crazy given how far the sector has fallen, but we are seeing major investment firms starting to call a bottom and stamp recommendation “buys” on the sector. These include CIBC, Bank of America Merrill Lynch and Cantor Fitzgerald.

Canada was an important market for marijuana because of its move to a fully-legal market, allowing companies to publicly list their stocks in Canada and take advantage of equity financing options. However, despite any disappointment with how its legalization actually played out, the marijuana sector opportunity is much bigger than Canada.

The strategic goal of many larger LPs was often to take that capital and reinvest it in non-Canadian opportunities, which are substantial. According to a June 2019 report from Arcview Market Research and BDS Analytics, the global legal cannabis market is on pace to exceed US$40 billion by 2024, assuming a compounded annual growth rate of approximately 20% per annum.

There is a lot of money to be made selling both recreational and medical marijuana in legal markets. The primary problem is that the main source of existing revenue is only in Canada at the moment.

Revenue and the associated earnings from Canadian marijuana retail sales have been poor, but most of that disappointment has now been priced into cannabis stocks, in our opinion. Larger names like Canopy, Aurora and Aphria should start to see revenue from global partnerships come on line next year, which could significantly improve revenue.

The chart below shows the key valuation metrics on the larger holdings in HMMJ, which show how much more “fairly” valued these stocks look even compared to three months ago. The price-to-book on HMMJ has dropped from 2.68 to 1.56, and the price to sales has dropped from 8.62 to 6.08 in about three months.


Source: Bloomberg as at December 27, 2019

On the individual names, the contrast can be even starker. There could be some outright failures, but overall, in our view, the sector looks a lot more attractive than at any point at which we’ve offered HMMJ.

Secondly, industry contraction and failures isn’t necessarily a bad thing. The first year of legalization in Canada has been a good test case to determine which companies actually have the business acumen to sustain a thriving business. Failures in such an environment are likely to happen, and when they do, they actually benefit the survivors, who should be able to exercise a little bit more control over sources of supply and price management.

This is not dissimilar to the early days of the internet, where there were numerous failures. However, the companies that stood the test of time built successful businesses, and the sector ultimately thrived. We are not suggesting that the marijuana sector has the same sort of upside as the global internet, but on a smaller scale, there is a real industry to be achieved globally and there should be companies that are going to capitalize on that.

Diversification across the cannabis sector has never been more important

One of the key benefits of HMMJ is the fact that it provides diversification.

As at December 31, 2019, the price return decline of HMMJ was more than 40%, but some of the big underlying holdings, such as Aurora and Tilray, saw declines in excess of 50%. In the case of a once-major holding, CannTrust, the losses were in excess of 80%. Investors who rolled the dice on holding a concentrated portfolio of individual stocks could have seen more substantial losses.

In its latest rebalance, HMMJ reduced its holdings due to the fact that a number of the underlying holdings fell below the minimum market cap thresholds to be included in the index.

Generally, this should be viewed as a positive development, because these issuer weights had become insignificant relative to the sector.


Company Name Ticker Exchange
Heritage Cannabis Holdings Corp CANN Canadian Securities Exchange
Emerald Health Therapeutics EMH TSX Venture Exchange
Eve & Co Inc EVE TSX Venture Exchange
Fsd Pharma Inc HUGE Canadian Securities Exchange
48North Cannabis Corp NRTH TSX Venture Exchange
Radient Technologies Inc RTI TSX Venture Exchange
Zenabis Global Inc ZENA Toronto Stock Exchange

Rebalancing of the North American Marijuana Index, and consequently HMMJ, occurs each calendar quarter. At that point, all stocks eligible for inclusion are generally re-weighted by their respective market capitalization. The holdings of HMMJ and its current portfolio weights are regularly updated and available at

HMMJ is an index (or passively managed) ETF, which seeks to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. This index is designed to provide exposure to the performance of a basket of North American publicly listed life sciences companies with significant business activities in the marijuana industry. The North American Marijuana Index selects from a current universe of companies that have operations that may include one or more of biopharmaceuticals, medical manufacturing, distribution, bioproducts and other ancillary businesses related to the marijuana industry. Securities within HMMJ’s index generally have a market capitalization of greater than CAD $75 million.

Within HMMJ’s portfolio, this has resulted in the survival of the fittest: HMMJ’s holdings are now more concentrated on companies that are maintaining a strong position within the cannabis industry, despite difficult market conditions.

The Biggest Opportunity in Marijuana: U.S. Legalization

Despite hosting most of the listings and capital markets investment, Canada has likely lost its leadership position as the world’s marijuana sector leader. In particular, this may be largely due to the poor rollout of recreational marijuana sales at the provincial levels, which has resulted in supply issues, poor sales and a general apathy towards recreational marijuana use, especially relative to vibrant markets in the U.S. such as Colorado and California.

For 2020, the U.S. market is the market to follow, as it will remain the single largest recreational market globally, despite the fact that marijuana use remains illegal at the federal level.

The biggest catalyst of any movement going forward is U.S. legalization — or at the least liberalization — of marijuana laws at the federal level. Given the discrepancy in the potential size of the Canadian and U.S. markets, the multi-state operators (MSOs) seem quite undervalued, relative to Canada. For context, according to Arcview Research and BDS Analytics, if the U.S. market grows at its current pace with marijuana use fully legal in the current 11 states, the U.S. market could reach US$30 billion by 2024, which only accounts for growth of spending in legal state markets.

That’s already six times the size of the projected size of the Canadian market. Many of the U.S. MSOs are fully operational and generating revenue in these legal state markets.

Investors can access indirect exposure to the U.S. opportunity through HMMJ, or directly by investing in the Horizons US Marijuana Index ETF (HMUS). Through either ETF, investors can achieve diversified geographic exposure to the long term opportunity in the North American marijuana market.

In late September, U.S. Congress passed the Secure And Fair Enforcement (SAFE) Banking Act, which seeks to provide clarity to banks and credit unions that would provide banking and financial services for U.S. marijuana companies. From a political standpoint, there is still a long road ahead for this bill to become law – it will still need U.S. Senate approval – but it does potentially open the door for U.S. financial institutions to get more directly involved in the financing of marijuana cultivation and distribution companies, regardless of whether or not marijuana becomes legal at the federal level.

Symbolically, the initial passage of the SAFE Banking Act makes the likelihood of progress on the much broader sweeping Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, more likely. The STATES Act is a bipartisan bill that, if passed, would protect marijuana businesses operating in legal states from federal interference.

The STATES Act would likely allow for marijuana companies to access financial services in a meaningful way, including potential listings with major U.S. stock exchanges. In many ways, this bill could have the same intended consequences as full-scale legalization, so it remains a potentially significant catalyst for the marijuana equity sector.

Any movement forward on either implicit or explicit liberalization of federal marijuana regulations would likely result in a significant shot in the arm for the entire global sector. We would anticipate upon such news that both Canadian LPs and U.S. MSOs would rally.

Like HMMJ, HMUS saw a contraction in its holdings due to a pullback in valuations.

HMUS seeks to replicate, to the extent possible, the performance of the US Marijuana Companies Index, net of expenses. This index is designed to provide exposure to the performance of a basket of publicly-listed companies having significant business activities in, or significant exposure to, the marijuana or hemp industries in the United States. Constituents of this index are selected from Canadian and U.S. exchanges. While some securities may be listed on major North American exchanges, the majority of the securities currently trade on North American exchanges that include, but are not limited to, the Canadian Securities Exchange and the Aequitas NEO Exchange.

The HMUS rebalance resulted in the removal of seven companies:


Company Name Ticker Exchange
Chemesis International Inc CSI Canadian Securities Exchange
Dixie Brands Inc DIXI Canadian Securities Exchange
4front Ventures Corp FFNT Canadian Securities Exchange
High Tide Inc HITI Canadian Securities Exchange
Rubicon Organics Inc ROMJ Canadian Securities Exchange
Sol Global Investments Corp SOL Canadian Securities Exchange
1933 Industries Inc TGIF Canadian Securities Exchange

Rebalancing of the US Marijuana Companies Index, and consequently HMUS, occurs each calendar quarter. At that point, all stocks eligible for inclusion are generally re-weighted by their respective market capitalization. The holdings of HMUS and its current portfolio weights are regularly updated and available at

The Cannabis Trail: Bumpy, winding —but profitable?

The marijuana equity sector has demonstrated that it is volatile, and all investors probably now understand how volatile things can be. We would not anticipate 2020 to be any different; there are still far too many companies operating in the sector currently chasing too little revenue. This doesn’t mean that investors in cannabis might not generate positive returns in 2020. A combination of possibly increased rollout of U.S. legalization at the state-level — and potentially the federal level — and new sources of non-Canadian revenue for larger Canadian LPs could result in the sector bouncing back.

Our ETFs offer a liquid and transparent way for investors to get exposure to the marijuana sector, with the added benefit of a potential yield, which has increased with the sector volatility since it is derived from securities lending revenue. In our view, ETFs like HMMJ and HMUS offer the most straightforward way to stay in the sector, with the added benefits of diversification and a potential income from securities lending, which could cushion some of the volatility that is likely to continue over the next 12 months.

Investors might be spooked about entering or staying in the cannabis sector, but it’s important to keep in mind that this is a nascent industry that isn’t going away anytime soon. The Canadian companies that have maintained viable businesses until now could benefit from partnerships in non-Canadian markets, while the U.S. — which analysts estimate will be a US$30 billion market by 2024, or six times bigger than Canadian market— is a region to watch closely, as lawmakers clarify marijuana laws at state and federal levels. So, with the hard lessons learned from 2019, 2020 may not be the year to give up on cannabis completely.

Performance Update as at December 31, 2019*

  1 Month 3 Month 6 Months YTD 1 Year Annualized Since
HMMJ -1.95% -24.19% -49.48% -33.82% -33.82% 1.22%
NAMMAR Index 0.62% -17.49% -47.25% -31.51% -31.51% -4.65%

* Source: Bloomberg, as at December 31, 2019. ** Since HMMJ’s inception on April 4, 2017.

The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The index is not directly investible.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

There are risks associated with HMUS. HMUS is expected to invest in the Marijuana industry in certain U.S. states that have legalized marijuana for therapeutic or adult-use, which is currently illegal under U.S. federal law. HMUS will passively invest in companies involved in the marijuana industry in the U.S. where local state law regulates and permits such activities, as well as in companies involved in the Canadian legal Marijuana industry. HMUS will not be directly engaged in the manufacture, importation, possession, use, sale or distribution of marijuana in either Canada or the U.S. Please read the full risk disclosure in the prospectus before investing.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The Leveraged and Inverse Leveraged ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a Leveraged and Inverse Leveraged ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager publishes on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.