Will 2020 Be Different For Marijuana ETFs

At the start of 2019, the marijuana industry was the 'new' hot investment. By the end of the year, no one was bragging about owning shares in the industry. Why did this happen, and is 2020 going to be more of the same, or should you consider buying into the up and coming industry now?

The marijuana industry still showed signs of becoming the next great thing early in 2019. The industry that was going to take the crown away from technology as the 'fastest-growing' sector in the market. In 2019 the 'pumping' of marijuana stocks ended. But that all came to an abrupt halt around July.

At that time, investors stopped believing the narrative that had been pushed for about 3 years prior. Legalized marijuana in a few States and Canada would help pave the way for global legalization and massive profits for all the companies involved. And don't forget about the new 'marijuana-infused beverage category, which spurred investments in all the big marijuana companies by all the big alcohol beverage companies.

No one wanted to miss out on the 'next big thing,' investors and multinational organizations.

Then reality struck when earnings report after earnings report indicated the industry was not profitable and way to segmented. Furthermore, the earnings reports indicated that while most investors and businesses in the marijuana industry wanted more States and countries around the world to legalize the use of marijuana, that the companies operating in the industry couldn't handle their current demand, let alone anything additional. Shortages in Canada plagued the industry in 2019 and highlighted the biggest problem wasn't opening new markets; it was how they would supply them.

Building new grow houses may sound simple. However, the red tape and political maneuvering typically haven't been easy. Also, in most areas that growing marijuana on a large scale is legal, it needs to be done inside grow houses due to the weather. When we think of traditional farms, we think of acres and acres of open fields as far as the eye can see. With marijuana farms, we are talking about a few large buildings. Granted they are really large buildings in most cases, but still not acres of fields. So, it's really no wonder why they are having supply problems.

Then we have the costs associated with the current 'growing' situation is not ideal and will likely continue to put a damper on the industry until it finds a way to grow marijuana on a mass scale outdoors. (Not that it is not done, it just currently is not being done legally in most cases.)

Adverse earnings reports came in due to the problems in the industry. Then analysts and market participants stopped talking about the industry and how everyone needed to be invested in it. This helped cause the demand for marijuana stocks to dry up, and the decline was on.

Since July 2019, the five marijuana ETFs that have been trading since then have all tanked. The ETFMG Alternative Harvest ETF (MJ) is down 48%, and the AdvisorShares Pure Cannabis ETF (YOLO) is down 50% since July 1st. The Cannabis ETF (THCX) is down 49% since July 10th, the Amplify Seymour Cannabis ETF (CNBS) is down 47% since July 24th, and the Cambria Cannabis ETF (TOKE) is down 41% since July 26th. (Only MJ and YOLO were trading before July and the other three ETFs began trading in July on the dates mentioned above.)

However, all three of the ETFs that debuted in July peaked in early August. This is likely due to the hype that surrounded the 'new' ETF options in the marijuana industry. This is because both MJ and YOLO were already declining when the other ETFs hit the market and saw brief jumps higher in early August.

As for 2020, all of the five ETFs mentioned are up over the last month, with MJ and THCX up more than 4.5% and YOLO up more than 5.5%. The industry may have hit bottom at the end of 2019, which would explain the past month's performance. But the fact remains that the industry is still struggling to turn profits. YOLO, for example, carries a price to earnings ratio of -7.26%, while THCX has the same metric at -26.24%, and MJ's price to earnings is currently at -56.07%.

All the hype investors heard about the marijuana industry over the past few years is likely correct; it could be the next big industry, and growth rates could be the leaders across all sectors.

At this time, though, we are still not yet there, and those companies operating in the sector have a lot of work to do to prove the industries hurdles can be overcome.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held positions in ETFMG Alternative Harvest ETF, AdvisorShares Pure Cannabis ETF, The Cannabis ETF (THCX), Amplify Seymour Cannabis ETF (CNBS) and the Cambria Cannabis ETF at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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