Elevate Your Portfolio With Marijuana ETFs

Right in the e t F circuit quote unquote, it comes up more And is there a potty t F was one of the top things that I would be asked about, just from people internally here knowing you know that I'm et F guy, like, Hey, my wife is wondering is there a potty t F? For many for a couple of years that was a question. I got a lot and there are, yeah, more than one. And there was a big moment recently where Canada just legalize this nationally. So it's the first G seven country to

legalize marijuana, recreational marijuana. Not only that, several states in the United States are doing it, and obviously there's federal issues, but you could kind of feel the cat out of the bag to a degree. And I think this A lot of people argue it's like the inpro prohibition, and I think it's a big deal. When an industry goes from no sales or nothing, or an underground market comes to the surface and now is all you know, you can capture that in terms of a new industry. So

it's major. So knowing all of that, Rachel Evans, Bloomberg News reporter who we've teamed with multiple times, we asked her to go go check this out for us, and she went up to Canada did a little slew thing, And this episode is all about Rachel booting the ground, trying to figure out what's going on with marijuana ets this weekend trillions, elevating your portfolio. Hello, can I'll possibly get a coffee from you? Guys? Can I get a larteum? Can you decare for me? Double? Be good? Actually? And

do you have any food at first? Next? The Cannabis and Coffee Cafe in downtown Toronto isn't the most obvious choice for a business meeting. Luridly colored bombs line the walls, and leaflets promoting the pain relieving benefits of weed dot the counter. But this is no ordinary rendezvous. I'm here to meet Christine or Hum Bloomberg's dedicated marijuana reporter for a virtual tour of the companies and products that are thriving now that Canada's legalized weed. How's again, can see

you freezing? It's not too cold out it was. Unless you've been hires a kite for the last twelve months, you'll have seen, heard, or read something about this nascent industry. Potstocks jumped a whopping this year, but it's been a

volatile ride, with as many lows as highs. But while you can now smoke away your losses with state endorsed weed, Toronto and the rest of Ontario won't sell it from stores of cafes until next year, much to the disappointment of my barristas, that is a beautifully depicted Cannabisly, if you guys are very clever, do you ever said? Instead, Christine and I take a scroll through a government run website called the Ontario Cannabis Store, the only place in

Toronto where you can legally buy a weed. Here, anyone over nineteen can choose between Sativa or Indica strains of cannabis pre rolled joints or oils and compare prices across scores of different brands. It's about ten Canadian dollar is program roughly the amount needed for two joints, and you can buy up to thirty grams about and ounce at any one time. There are a lot of rules where the logo company's logo can't be figured that this giant THHC warning signs, so they're really and the it has

to be like plain pasting they have. They're really circling like the colors and decoration they can use, so it looks very law. You're very restricted in what you can say about the products, so you can't say our marijuana will make you feel amazing, or you know this show people having a good time while smoking, and so how do you raise brand awareness? Well, for a lot of

people are just reportedly coming from the black market. They know a stream that they like, they're finding in the store buying it, and they don't care what, what company or what brand is coming around. Shopping for online is a strange experience. Antique illustrations of marijuana leaves jostle with warnings about health risks, and many of the most popular

products have already sold out. The breadth of the market is certainly apparent, but so is the difficulty for both smokers and investors in differentiating between a bad trip and green gold. Enter exchange traded funds, there are I think a hundred and forty or so publicly traded canabis companies, and that that will very completely narrowed down to you know, a dozen clear winners, right, so you're gonna see a lot of consolidation, and you're gonna sees bankruptcies inevitably. I

think these companies are not always to survive. Rather than trying to guess who the winners and losers are going to be, to invest in a basket of stocks and just say what I'm doing is anything about on the industry as a whole. Steve Hawkins started the world's first marijuana ETF in April two seventeen. The chief executive of Horizons ETFs has always been something of a maverick, specializing in the leverage and inverse products that inspire love or hate.

So the controversy around a potty t F held no fair. The deviation returns from peak to traff that we've seen on individual names is astronomical. It's just crazy, but when you own the e t F, you're owning party exposure to that party, exposure to this. It's still extremely volatile, but it's still more lead. You even keeled standard deviation of returns on a relative basis. I met Steve at his offices a few blocks from the coffee shop to learn how the Horizons Marijuana Life Sciences e t F

came to life. A blog his company ran for investors kept throwing out requests for a potty TF. So in the fall of he set about making that dream reality. From the get go, it was a challenge. It was a very new precedent for me in you know, having launched you know, fifty six products over the past five years. Uh, this was something completely different we've never seen before. Did anyone think you were a little bit nuts when you kind of came to them with this and said, you

know what, we want to put marijuana stocks in an? Absolutely? Absolutely, And that's why it was. It was extremely sensitive subject matter. There's such a negative stigma at that point in time

that was still associated with marijuana. Even with the development an approval of medical marijuana and how integrated into Canadians lifestyle, it was becoming you know, it was there was a lot of silence on the other end of the phone lines when when you asked the question, and it's like all you could hear in the in the background was the wheels clicking and people thinking, really you want to do this? Wow, that's not something that we have traditionally

ever done. And you know, we went through, you know, several layers of beer cratic approval at every single third party service provider we went to, like, you know, it didn't just stop at the partner or if it really had to get escalate it to their boss and then their boss. Eventually he persuaded an index custodian and market maker to get on board, but Steve still needed buy in from the Toronto Stock Exchange. The exchange had listed a handful of cannabis companies, but anyt F of those

companies still made it squirm. Even once we've got all the third party service providers lined up and the index providers done, and we have figured out how we're going to launch this and how we're going to management, then I had to go through a very long process of approval with the t SEX. Normally, with the t SEX, it's pretty much switch and it's here's the information, here's our application, here's our filing fee. Thank you, Steve, We've

got all the documentation switches on. It was a many week process and dealing with the exchange their lawyers and our lawyers. Numerous conference calls, numerous discussions. There was a whole negotiation procure, but it was worth it. After eight months, Steve's fund, which goes by the ticker h M m J, launched a wave of publicity. I didn't want to be second. I wanted to be the world's first, and we did

accomplish that. In hindsight, we probably could have waited to four twenty or something like that, but you know, we were We felt we were in competition with a group in the US that was trying to launch a similar product um and from a time in perspective, if I had approval, I wanted to go. That fear didn't materialize. In the US, cannabis remains illegal under federal law, and want to be issuers of pop funds have struggled to convince federally regulated companies like banks to supply back office

support Jeff's sessions. The U s Attorney General is stepping down, apparently at the request of President Trump. This is a huge moment for the cannabis industry. You might remember earlier this year, back in February yourself, u acceptions laid down the gauntlet on the cannabis industry. Uh he. With the Attorney General Jeff Sessions now ousted, the cannabis industry has outlasted one of its most vocal foes, but the Trump

administration probably won't budge overnight. Consequently, while there are a handful of pot tyts in Canada, the US has just one, The e t f MG Alternative Harvest TTF, which goes by the ticket MJ started life as a Latin American real estate fund, side stepping the startup challenges that to

plague the ambitions of others. It's it's very unfortunate for the US cannabis industry that the government really hasn't been able to see the writing on the law as we have in Canada, and Canada was the first G seven country to go recreational approved, and I think there will be more to follow long before the US. Right now, we have the ability to go outside of Canada to put boots on the ground operations, to export product into these companies or countries on a worldwide basis. So we're

creating a globalization of the cannabis industry. And it's interesting that it's Canada that's driving it, not the US, and we have a significant competitive advantage over the Americans. Right now, we've got our footh hall, but the winds of change may be blowing. More than six of Americans support legalization, and more and more states are putting medical and even

recreational use on the ballot. Some estimate that the U s pot market could grow to billion, and the global market could eventually be worth a hundred and fifty billion. But for others, the pots stock craze is just that, a craze that won't last long. That's the thinking of Jared Dillion, who ran the ETF desk at Lehman Brothers in two thousand and eight. Now editor of the Daily Dirt napp and market newsletter, He's seen his fair share of bubbles and thinks the pot industry's potential is limited.

Even in the US. Culturally, we have already reached peak acceptance of marijuana um even though it's not completely legal. This is the highs and acceptance. The projections are understandable, you know, given how optimistic people are about how widespread or pervasive use of this stuff could get. People like the dream big in certain trades, and this is a trade where you can dream big. But the problem is is that the stocks basically priced in all that growth

almost immediately. Valuations are certainly looking to the future. Till Ray, which was worth fifteen billion dollars at the height of the potstock rally, has only about ten million dollars in revenue last quarter. Steve Can sees that there's a lack of hard data, but it's bullish on the market over the long term. This is an extremely rumor mill driven industry. There's no doubt of it. I've never seen anything like

it from history. You know, you can have every stock down and then there's a little rumor about coke and such and such are Pepsi and such and such are Molson Coors and such and such, and that company stock is up in literally five minutes, and and that has a waterfall effect to all the companies in the industry. You know, the industry is still new. There's still isn't a lot of known quantitative facts with respect to how

big the industry is going to grow from here. With the recreational approval, and it will be very very interesting to see where this company stands when these cannabis companies have to do all their financial regulatory reporting and we actually start to see hard financial results that you get introduced by the analysts on the street and um, and what these companies are you know, actually producing so um. If you want to invest in this space, it's not

for the faint of heart. You need to check the batteries and your pacemaker and you have to look at it from my perspect give as a long term investment. Okay, so let's come down off that high. Rachel, thanks for doing this trip to Canada for us. Thanks for having me again. So what have you learned about this space both through the reporting for this podcast and also leading

up to it. I think what I really took away from this it is kind of like what potential and yet also how hard it is to actually estimate how

big that potential is going to be. It's like reality versus potential exactly, and that's everybody's trading off the potential at the moment, and that's why you're seeing where you saw, I guess this huge potstock rally earlier in the year, but talking to kind of some people around the industry, it really depends on how that translates into actual sales of weed now that weed is legal in Canada, and

how that translates into revenue. I thought was really interesting stat that I mentioned the report Tilray had a market capitalization of fifteen billion at its peak, but it's revenue last quarter was only ten million. I mean that shows you kind of like how much these things have been inflated in terms of their valuation, and we won't actually start to see kind of like financial reporting until next year.

That's when we're going to start to really see that the rubber hit the road, as it were, and see

whether some of these valuations really hold up. I have a question for you, Well, one thing I thought was interesting was you said this caught pain relieving benefits, And to me, this is one of these big points because if this can be put forth as a substitute for the for opioids, which is a huge problem here, it almost feels like you can maybe win over even the most conservative people that would did that come up a lot? Is that a big point? I mean, this was the

topic of the leaflets in the cafe. I went to CBD um. This is kind of like the property within cannabis that allows you to kind of like ease away some of those pains. And yeah, the opioid point really did come up. I was chatting with one of the baristas, a guy called Joe, and he was telling me that he used to be addicted to opioids. He had some after he had I think it was a car crash, he said, And he was addicted to opioids for about five to seven years. Is then he started smoking marijuana.

And as he said, it wasn't so much a gateway drug, is an exit drug for him. That allowed him to come off the hard arapioids. That's powerful because that will win over the people who just look at it as a good time. Still not legal in the US everywhere, I mean certain places, right, but you can still invest. It is legal to invest. A great ticker here, m J, right, so MJ is the one in the US. Let me give you a few caveats here. First of all, the

way MJ happened was a little unusual. It was a ticker called Layer, which was a Latin America real estate and it was from a white label issuer who I guess had ultimate power and decided, we don't like what Layers doing. It doesn't make money. Let's just switch it over the strategy, the name, and the ticker, everything, and we'll make it a potty t F. And I think it was last December, you just woke up, and I

think it was after Christmas. American Now I owned marijuana the good nobody really owned Layers, So there probably was maybe the guy's family weren't was in it maybe at best. And then MJ immediately I think it got a couple hundred million right off the bat. There was definitely it tapped into to some demand. Now there's since then, Uh,

there's issue with the company's custodian. This company is also dealing with a lawsuit multiple I think, and this company has always kind of got this sort of cloud over it, and I just think that's important to know here with yeah, um, but you know, at this time, MJ is a ticker, it trades, it tracks the index, although we actually looked at MJ and it does trail the index by about ten percent over the past year. The reason is is

because their custodian wasn't letting them do securities lendings. So it wasn't able to make any money back, and til Ray was so hard to buy when they tried to rebalance into it that they were the index doesn't have to actually buy stocks, and it's like lives in a vacuum. The e t F was unable to buy until Ray fast enough to match the index, so it lags a little bit. But those are just some caveats to know, but it because it's the only one, UH, people overlook

almost all that. One thing interesting to kind of like just chime in on that is with h mm J, that the one in Canada. I got talking to see a bit about who owns that, and it was really interesting to me. I think he said, like sevent is owned by Canadians, but the other thirty percent is owned by non Canadians. They get some of that data through their transfer agent because they have to report it in Canada,

which I thought was fascinating. He said that they've seen buyers from the UK, from Israel, from Asia, so there's clearly interest in buying h MMJ, not just within Canada, but actually externally as well. UM, and you know hm m J, the one in Canada that was the first to market in the world, Um. What was interesting about that one is it came out and obviously I think it got I don't know, I want to say, five

million dollars pretty quickly, and then it fell. Um it came out after a long run in part, but then after the e t F came out, it dropped. And normally when a new e t F comes out, especially a high flyer goes down, people leave, they don't stick around. But nobody left. The assets stuck stuck there, and it's highly unusual. That's why pot investors maybe the best investors. If you're an issuer, they either forgot or again. They're tapping into people who believe in the story for the

long term. And I think that that's just an interesting data point about h M m J. And that's something that that Steve brought up of horizons as well. I mean, he was saying that, you know, this is a very volatile play. If you're going into potstocks, even in an e t F form, you need to be very well aware that you could go very far down as well as very high. So you need to be thinking about that when you invest in his His thing is you check your pacemaker. If there's got to be in there

for the long hall. Right on that note, in terms of hanging there during volatility, I thought what Christine said the reporter from Canada that a hundred and forty publicly traded cannabis names will be narrowed down to a dozen. Consolidation that E t F isn't is could be really helped out by M and A, especially if you see that kind of consolidation UM from especially these big tobacco companies start buying up these small pot stocks. Um, that

was a good point. What will that look like? Uh in the e t F. Then as that starts to happen as an allist, how do you look at that? Well, when you have these small ETFs like um, that a stock could go up fifty in a day, you have no way knowing that targets are the ones that benefit, right, So uh, we would see a big bump in the e t F. Although diversification helps you obviously in downturns, but it also limits your up so you wouldn't feel

all that fifty percent. You might feel like might lift the e t F like six percent, but that's a that's better than not and that's the thing I mean. Christine also mentioned that you know, there there will be some people out there that will be the you know, the equivalent of the Apple investors. Oh, I was there in the beginning. I owned Apple, But you know, and

people will be doing that with certain pot stocks. But if you want to take a long term play on pots and you don't know which of the companies out there are going to be targets or acquirers, then you might as well think about this from a kind of broad diversification sector. I mean, that's what an ETF does, right. What I liked about this was the physical nature of it, and I sometimes think a part in bit point they've always been linked to, like you know, stuff that's been

a craze in the last five years. But bitcoin, you there's no stores, you can't touch it. It's not usually as currency. Here you went to stores, there's there's people working there, you can buy it. Did did did it change for use? Like actually seeing it literally there physically. I Mean the thing in Ontario is is that it's kind of like in transitionary phase, right. I Mean, you've still the only place you can legally buy weed is

online in Ontario, So that's kind of strange. Let's go through a government website, and by part like it feels sort of, you know, like you're stepping over a boundary there. But I mean you could still buy it from dispensaries that were on the streets that were selling it illegally. I think they are cracking down on that because now obviously we'd equals tax dollars, so that's something they want to kind of push out. But I thought it was really interesting. I mean that the coffee shop I went

to was called Cannabis and Coffee. People are ready for when weed is available to be sold as edibles and coffee shops, and they want to have a dispensary also in in that coffee shop upstairs. Then you can actually buy you know, how to paper bag and take it home with you. As as it stands, now, you can buy specific e t F s that are in this sector. Right. I'm also interested in will will these stocks or aspects of the e t F enter into broader products so that it's like you just get a little hint of

marijuana somewhere in a larger product. Do you think that's gonna happen? Of course, the if you own a big mainstream et F like v t I, the total market. Um, you know, you're gonna feel a little this. The problem is the indec like a contact hie. Yeah yeah, you yeah,

you're like maybe ten yards away from the smoke. Because the problem with these big indexes and these fledgling industries like robotics or pot or any of these it takes these indexes are very conservative with when they take a stock in, it's got to have all kinds of requirements. You miss a lot of the toddler growth spurts, and again you also missed the vaultility and that's a payoff.

So I would say that, yeah, if you held just regular stuff, you'll eventually fuel pot, but you will probably have missed a lot of the um you know, teenage years or toddler years of the growth of these companies that you would can get in the specific ets. Okay, So Canada has done this. The US obviously there are different states from the Colorado's and California's and Oregons and Washington's and now Missouri of all places like, so we've

seen this evolution. Obviously, there's federal laws that are different than state laws. How do you see the investing landscape changing in the US? That is the big question that I think it's on everybody's mind in Canada. Canadians have an advantage here, right they are first out of the gates, But there's a certain level of skepticism or I guess caution perhaps about what happens when the US does come online.

And one of the ways in which you know you've seen sort of Canadian companies listing both in on the Canadian Stock Exchange and on the US stock exchanges is providing that they don't have businesses in the US. So that means that when we do see legalization come through in the US, that could put them at a disadvantage and actually taking advantage of that. We currently have ten states I believe that have fully recreational legalized cannabis, and I think it's thirty two or thirty three where you

have medical marijuana legalized. That I believe it's about seventy of the American population in a state where cannabis is legal in some respect. That's huge, but you've got to remember that from a federal perspective, it is still illegal. And the Trump administration has definitely been against marijuana. You know, you've seen that through number of speeches kind of coming

out from them over the last few months. So it really depends on whether after mid terms we see shift in tone and we start to see a move towards for legalization, or we could see something coming through from Congress. There's an act there that could pass called the Strengthening the Tenth Amendment through Entrusting States Act, which that needs

a nickname. The nicknames states. Yeah, very clever, But that is the US to give you know, sort of state se confidence to have their own rules on cannabis and not worry too much about the kind of federal illegality. There's also little things like I think New York they stopped arresting people right if you smoke it on the streets, and I live in Philly, I'm telling you I smell it way more people are just not as it's just the cats out of the bag. It just I don't know,

I decided feels like it. We have a code for that in my house, we say smells like Colorado. Rachel Evans, thanks for joining us in trillion, Thanks for having me, Thanks for listening to trillions. Until next time. You can find us in the Bloomberg Terminal, Bloomberg dot Com, Apple Podcast, Spotify, and wherever else you like to listen, we'd love to

hear from you. We're on Twitter, I'm at Joel Wepper Show, He's at Eric Baltunist and you can find Rachel at Rachel Evans Underscore and Why Trillions is produced by Magnus Hendrickson. Francesca Levy is the head of the Bloomberg podcast five