James B. Francis, CFA
Chief Research Officer, CRB Monitor
The Nasdaq CRB Monitor Global Cannabis Index (HERBAL) is designed to track the performance of a selection of global companies engaged in Cannabis-related business that are legal under applicable national and local laws, including U.S. federal and state laws. HERBAL is the result of a collaborative effort by Nasdaq and CRB Monitor Securities Research. The HERBAL methodology uses current market data and proprietary CRB Monitor data to construct a global, pure play, investable cannabis index that is the “gold standard” benchmark for cannabis investors.
We are a little more than 3 weeks into 2022 and it looks like investors still have not woken up from the nightmare that was 2021 cannabis equity performance. Nearly across the board, we are seeing cannabis stocks in a prolonged downward spiral, dragged down by some of the marquee Canadian “powerhouse” names like Canopy Growth Corporation (TSX: WEED), Tilray (NYSE: TLRY), and Aurora Cannabis Corp. (TSX: ACB). The reasons for this prolonged slump persist: delays in US federal legalization, lingering effects of the pandemic, and ongoing supply chain issues, among other things.
Source: MarketScreener.com
Cannabis-themed ETF performance has taken a big hit (no pun intended) as well. The Horizons Marijuana Life Sciences ETF (TSX: HMMJ) has a negative 16% return through January 26th. The Advisorshares Pure US Cannabis ETF (NYSE: MSOS) has lost 17.9% and its partner, the Advisorshares Pure Cannabis ETF (NYSE: YOLO) is down more than 20%. On a similar note, the Nasdaq CRB Monitor Global Cannabis Index (HERBAL) is down 16.5% for the same time period. The ETFMG Alternative Harvest ETF (NYSE: MJ), which launched back in December 2016, closed on January 25th at $9.76, which is dangerously close to its historical low. With that said, MJ has outperformed the field, down 12% year-to-date (see chart above).
Question: If these investment vehicles are all considered “cannabis-themed” why are we are seeing the field underperform the MJ ETF by more than 4-8% this month?
The answer is in the underlying holdings. While cannabis-themed products like the HERBAL index have been constructed as 100% “pure-play” cannabis indexes, the MJ fund tracks an index in which 10 companies comprising more than 30% of the constituents are either “non-pure-play” companies or those with no apparent cannabis link at all (“non-CRBs”). The exposure to these 10 companies which have either incidental (“non-pure play CRB”) or no actual connection to the cannabis industry (“non-CRB”) has the effect of “dampening” the performance of the pure-play cannabis positions that are held by the ETF.
MJ’s holdings include “non-pure play” CRBs like British American Tobacco P.L.C. (LSE: BATS), Altria Group, Inc. (NYSE: MO), and Scott’s Miracle-GRO Company (NYSE: SMG), all of which have a connection to cannabis, but cannabis-related revenue is incidental; for that reason they fail inclusion in a “pure play” index like HERBAL. In addition, MJ holdings like Arena Pharmaceuticals Inc. (Nasdaq: ARNA), Swedish Match (NasNordic: SWMA), and Vector Group Ltd. (Nasdaq: VGR) are companies that have no apparent connection to the cannabis industry, and fail inclusion as well.
In January, the positive performance impact from the 10 “outlier” companies held by MJ has been significant, as all of these companies have outperformed the “pure play” cannabis basket. In fact those holdings make up nearly all of the performance difference relative to the pure play indexes. With that said, investors in cannabis-themed ETFs are looking for returns that are as pure an expression of the cannabis theme as possible and we are likely to see a reversal in this effect when cannabis returns are back to full strength. Moreover, investors should always expect higher volatility in an ETF made up of 100% “pure play” holdings, but that’s what they have signed up for.
CRB Monitor tracks ~ 1,400 publicly-traded, Cannabis-Related Businesses (CRBs) globally, which have ~1,600 traded securities. We categorize CRBs into our proprietary cannabis risk tier framework and cannabis-linked (CLS) sectors. In addition, CRB Monitor unravels and maintains complex corporate structures, linking publicly-traded parent companies to their underlying operational plant-touching subsidiaries. Custodian banks, broker/dealers, and asset managers find our data essential for pre-trade compliance, risk management, index construction, and portfolio analytics.