Retail investors continue to be a driving force behind the valuations of marijuana stocks. It was a volatile quarter for marijuana stocks in particular within the sector benchmark, represented by the Horizons Marijuana Life Sciences Index ETF (HMMJ), which had a -13.71 percent return at the end of the second quarter but is still up 34.62 percent on a year-to-date basis as at June 30, 2021.

If expectations of U.S. growth potential continue to not meet the lofty expectations investors have set, the next quarter could be characterized by further consolidation and more of a holding pattern. Investors are likely waiting for guidance on potential regulatory changes that could lead to U.S. federal legalization or at least the potential for U.S. listed stocks to have federally legal U.S. cultivation and distribution businesses.

Much of the slowdown in marijuana stocks can be attributed, in part, to the torrid pace of growth experienced in Q1 of 2021 even as it appeared that many U.S. investors were purchasing U.S. listed marijuana stocks in advance of anticipated legalization.

There are two important dimensions to this:

  1. Most major state-based markets now have some form of legalization, so a lot of the pricing on U.S. market growth was likely priced in. 
  2. The stocks that investors have been putting money into in 2021 are largely American- listed Canadian Licensed Producers (Canadian LP) which only have cursory exposure to the U.S. since their listings – the very thing that allows them to attract U.S. retail investors – prevents them from directly owning American cultivation and distribution operations.
Do Marijuana Stocks Need U.S. Federal Legalization?

This is a loaded question. The Canadian LPs that currently dominate most of the investor inflows so far in 2021, and make up the bulk of the holdings of HMMJ, we feel need legalization to move their businesses forward. Canadian LPs are still for all intents and purposes “trapped in Canada” until they can transition to U.S. cultivation businesses. 

Without federal legalization most of the Canadian LPs have little to no access to U.S. market expansion, which in 2020 surpassed US$17.5 billion in annual sales, according to BDSA Research. With U.S. federal legalization, the Canadian LPs could see rapid revenue growth by engaging in aggressive U.S. expansion, through mergers and/or acquisitions, financed by their ability to tap into capital markets.

This is not to say Canada is an unattractive market. Firms in Canada are starting to move closer to profitability based on increasing sales continuing to drive forward record levels. 

The quarterly rate of marijuana sales has nearly doubled from Q1 2020 to Q1 2021. Nearly C$850 million in sales was generated in Q1 2021. Due to this, Canada is on pace to generate over three billion dollars in annual sales for 2021.

Canadian Cannabis Sales (In Thousands)

Source: Statscan as at March 31, 2021 (Most recent data).

Compare this impressive sales growth to the U.S. and it is not all that comparable. The states with legalized distribution are generating about US$1.6 billion in sales a month, which puts the U.S. on pace to potentially close in on US$20 billion in sales for 2021. States like California easily generate more in sales than all of Canada combined.


Source: MJBiz as at May 31, 2021.

This underscores the crucial fact that the lack of federal legalization hasn’t inhibited these corporations from building viable and successful businesses in the U.S. The American domiciled multi-state operators (MSOs) are generating very strong sales with 18 states now offering legal recreational and medical cannabis usage and a further 20 states that have legalized medical marijuana usage. 38 of the 50 U.S. states have some form of marijuana legalization with Texas now being the only major populous state that has not passed any form of legalization measures.

Source: MJBiz Daily, as at June, 2021.

The only ancillary benefit of federal legalization for the MSOs would be they could finally get U.S. stock-market listings and tap into U.S. retail investor demand. This federal legislation doesn’t necessarily have to be complete legalization of marijuana. In April, The US House of Representatives approved the Secure and Fair Enforcement (SAFE) Banking Act of 2021, also known as the SAFE Banking Act. This law provides the possibility for financial institutions, such as banks, to conduct business with cannabis enterprises that are licensed in states which allow cannabis for either recreational or medical use. If passed at all levels of government, this legislation could open the door for U.S. MSOs to access their capital markets. Very quickly there could be a significant reversal in flows towards U.S. companies actively engaged in growing their businesses.

Most of these MSOs can be accessed through the Horizons US Marijuana Index ETF (HMUS), which is the first index ETF in the world to provide direct exposure to U.S. marijuana stocks almost exclusively listed in Canada. Through most of the year, these stocks have traded at a lower valuation than the Canadian LPs even though they are directly involved in the higher potential growth market in the United States. Their challenge is they cannot access the same level of capital funding through equities that the Canadian LPs enjoy.

There has been some interesting consolidation in the MSO space - the biggest being Trulieve’s acquisition of Harvest Health in May of 2021 for US$2.1 billion, to date the biggest MSO merger. The new combined entity is expected to easily surpass US$1 billion in sales in the next 12 months. The new entity will have operations in 11 states with 22 cultivations and 126 dispensaries. This kind of seed-to-sale scale simply does not exist in the Canadian marketplace, so it could be viewed that at least at the industry level, players believe the valuations on the MSOs are compelling for consolidation relative to the future potential.

Below is the breakdown of the relative valuations of HMMJ and HMUS and their top 10 holdings.  The metrics for HMMJ and HMUS reflect the simple weighted average of these metrics from the underlying holdings in each ETF portfolio. You can see that HMUS has a higher price-to-book ratio than HMMJ but nearly 4x times the sales growth of HMMJ.




Getting Paid to Wait:
If stock performance on HMMJ and HMUS remain range-bound, there is the added benefit that both HMMJ and HMUS currently pay a monthly distribution.

An often overlooked benefit of HMMJ and HMUS is that both ETFs are expected to pay a distribution. Typically, companies in early-stage industries aren’t expected to generate any significant yield for their investors. That’s certainly true of marijuana-focused companies, which are not typically expected to pay out any dividends.

Securities lending is a common practice for many mutual funds and ETFs.  Mutual funds and ETFs have the ability to lend out up to half of their underlying securities and earn additional income.

Due to several factors that include, but are not limited to, volatility, the amount of free-market float and available lenders, many of the stocks in HMMJ and HMUS can at times be lent out at higher-than-average lending rates compared to what is available for traditional large-cap equities.

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. Neither HMMJ nor HMUS will 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 respective prospectus before investing.

HMMJ will not knowingly invest in any constituent issuers that have exposure to the medical or recreational marijuana market in the United States, unless or until it becomes legal. HMMJ will not be directly engaged in the manufacture, 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 value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. 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. BetaPro Bitcoin ETF (“HBIT”), and BetaPro Inverse Bitcoin ETF (“BITI”), which are a 1X ETF, and an up to -1X ETF, respectively, as described in the prospectus, are speculative investment tools that are not conventional investments. Their Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, neither ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. Please read the full risk disclosure in the prospectus before investing. 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.