Horizons Marijuana Life Sciences Index Exchange-Traded Fund gives you three benefits: diversification across a number of larger marijuana stocks; regular re-balancing by a professional manager; and attractive cash distributions.
Cannabis has long been used for medicinal purposes. Now the recreational use of marijuana in Canada is legal. This is creating a new and potentially profitable industry. According to one estimate, the legal marijuana market in North America is expected to hit sales of US$24.5 billion by 2021.
The trouble is, it’s hard to know in advance the winners from the losers among marijuana stocks. Canada is home to over 120 licensed companies. Many are new and have no long-term track record of success. That’s why we advise you to adopt what we call the ‘basket approach’.
You can diversify away your risk
One way to reduce your risk and raise your profits is to diversify your holdings across many companies. One easy way to do this is to buy an index ETF (Exchange-Traded Fund). That’s why we’re adding Horizons Marijuana Life Sciences Index ETF (TSX—HMMJ) to our list of Key Stocks. You can buy it in Toronto like an ordinary stock. But while stocks give you ownership in one business, HMMJ gives you exposure to large producers or distributors of marijuana.
On January 30, HMMJ’s net assets totaled more than $892 million. HMMJ’s top 10 holdings are Canopy Growth Corporation (TSX—WEED), Aurora Cannabis Inc. (TSX—ACB), Cronos Group Inc. (TSX—CRON), GW Pharmaceuticals PLC (NASDAQ—GWPH), Scotts Miracle-Gro Company (NYSE—SMG), Tilray Inc. (NASDAQ—TLRY), Aphria Inc. (TSX—APHA), HEXO Corp. (TSX—HEXO), CannTrust Holdings Inc. (TSX—TRST) and Green Organic Dutchman Holdings Ltd. (TSX—TGOD).
Rebalancing keeps your units up to date
HMMJ writes, “The marijuana industry is rapidly growing and evolving. Quarterly re-balances seek to ensure [that] the composition of HMMJ reflects the changing leadership and drivers of growth within the industry.” Rebalancing lets your units keep up.
Most marijuana companies are reinvesting their cash into their businesses. As a result, few pay dividends. Even so, HMMJ recently made a quarterly cash distribution of $0.2876, or just over $1.15 a unit a year. This provides an attractive yield of 5.3 per cent.
HMMJ’s management fee is 75 basis points a year, or 0.75 per cent. This seems reasonable given HMMJ’s benefits of diversification across many big marijuana companies, rebalancing by a professional manager and the payment of cash distributions.
HMMJ is a buy for long-term unit price gains as well as attractive cash distributions.
This is an edited version of an article that was originally published for subscribers in the February 15, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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