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The United States marijuana sector, which is comprised primarily of multi-state-operators (MSOs) — vertically integrated companies that cultivate marijuana and own dispensaries and retail distribution in various U.S. states – has rallied over the last month.

The sector, as represented by the Horizons US Marijuana Index ETF (“HMUS”), the only index ETF in the world exclusively focused on the U.S. Marijuana sector, is up more than 40% for the 30 days ended May 22, 2020, while the more widely held Horizons Marijuana Life Sciences Index ETF (“HMMJ”) is flat on the month.

What has created this disparity? For starters, despite not being federally legal, the U.S. marijuana market is projected to be the largest in the world by 2024, according to Arcview Research and BDS Analytics.

According to BDS Analytics and Arcview Research, the U.S. Cannabis market sales closed in on nearly US$12.2 billion in sales in 2019, roughly ten times the sales generated within Canada. Key state recreational markets that have recently come online, such as Illinois and Michigan, will add about US$700 million in annual revenue this year, according to Arcview and BDS Analytics. Those states join other major state markets such as California, Colorado, Nevada and Washington State as key hubs for recreational sales.

The largest publicly traded MSOs are all seeing revenue growth rates rise by double-digits per quarter, according to Arcview Research and BDS Analytics. The growth is exponential, but on a relative valuation basis, these stocks continue to trade at a discount relative to many licensed producers (“LPs”), Canadian corporations or corporations in countries with federally legal status to produce marijuana. This is simply because the legal status of their businesses remain challenged by federal prohibition, and accessing largescale equity financing through both debt and equity is challenging in this environment. In some cases, these constraints are limiting the expansion potential of these companies, resulting in stagnancy.

The COVID-19 crisis, however, has possibly highlighted that the U.S. marijuana industry doesn’t need federal legalization to thrive, and indeed, many of the key stocks held in HMUS have demonstrated exponential revenue growth, which seems to be attracting investors.

The chart from Marijuana Business Daily below shows that in states that don’t rely on tourism sales for marijuana —Nevada (Las Vegas) and Colorado are tourist destinations, and this is a widely studied metric for data providers of marijuana sales — sales have continued to grow during the COVID-19 restrictions. However, calling marijuana business “recession-proof” would be premature. The ability of the sector to grow sales during an environment where most retail is constrained has surprised many.

Adult-use cannabis sales by month and market in 2020:

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During April, U.S. MSOs experienced significant rallies in their valuations, with many of the larger MSOs such as Curaleaf, Cresco, Harvest Health and Trulieve generating double-digit returns. If you look at the revenue from a company like Massachusetts-based Curaleaf, for example – which recorded one year sales of US$221 million as at March 2019, nearly triple the US$77.1 million that it brought in the year before, for the same period– those types of revenue numbers exceed those recorded by many of the larger Canadian LPs. For comparison, Ontario-based Canopy Growth’s annual revenue was C$226 million. Curaleaf has about a US$3.2 billion market cap vs. US Canopy’s $5 billion market cap as at May 13, 2020, according to Bloomberg.

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Source: Bloomberg as at May 22, 2020.
*Since HMUS Inception: April 17, 2019

The indicated rates of return are the historical annual compounded total returns including changes in per unit/share 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 returns are not guaranteed, their values change frequently and past performance may not be repeated.

Can the Momentum Continue?

If you compare the revenue generation of the MSOs to Canadian LPs, there does seem to be a disconnect. The Canadian LPs have global footprints, but their primary source of revenue comes from the Canadian market. Building up retail distribution in Canada has been a challenge, as the largest provincial market in the country, Ontario, was slow to roll out independent retailers, such as stores not owned by producers. This has created both supply and demand challenges, but most importantly, it simply has not allowed the Canadian LPs to penetrate the Canadian retail market to the extent that many would have forecast at the dawn of legalization in October of 2018.

What the Canadian LPs do have, though, are listings on major stock exchanges such at the Toronto Stock Exchange, the New York Stock Exchange and the NASDAQ. This means that, by default, they become more widely accessible to investors in North America, particularly through online brokerages. The U.S. MSOs, while based in the U.S., have primary listings on Canadian exchanges such as the Canadian Stock Exchange and the Aequitas Neo, which are more difficult for American investors to access, although some U.S. investors trade these stocks on the overthe- counter (“OTC”) market.

This recent rally may predominantly be the result of Canadian retail investors and OTC investors deploying new capital into the U.S. sector of the global cannabis market. There may also be opportunity in the sector if you consider the potential these stocks might have if they can get a wider investor audience over the next 12 to 18 months.

In the meantime, HMUS is the only ETF focused on exposure to this sector that can provide diversified exposure across all of these names. Similar to the broader story, there will be winners and losers in the U.S. sector, but as the sector grows in aggregate, HMUS could potentially gain meaningful growth from that development.

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*Since HMUS Inception: April 17, 2019
Source: Bloomberg, as at May 22, 2020

There are risks associated with this product. 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.

The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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Marijuana Stocks: Holding Up Better than Expected?

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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 use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF do not track an index but rather a compounding rate of interest paid on a cash deposit 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.