Fund in Focus: Horizons Marijuana Life Sciences ETF

Extremely volatile sector not for everyone

Since the legalization of cannabis, interest in the marijuana sector has grown considerably, and not a week goes by where I don’t get a question or two about the prospects for the sector. Many are speculating that we are seeing a once-in-a-lifetime transition, not unlike the repeal of the U.S. Prohibition law in 1933. While there may be some truth to that, it’s tough to justify the valuations of many of these companies, even after recent selloffs.

To invest in the space, investors really have only two options: invest directly in the underlying companies or invest in a fund. In the ETF space, there are three options, of which the Horizons Marijuana Life Sciences ETF (TSX: HMMJ) is the most established, having debuted in 2017.

The ETF invests in companies involved in the legal aspects of the marijuana industry, including those involved in medical research, growers, and other ancillary businesses.

Some of the top holdings include medical marijuana companies Aurora Cannabis (TSX: ACB), Canopy Growth (TSX; WEED), and Aphiria Inc. (TSX: APHA). Ancillary business holdings include fertilizer company Scotts Miracle-Gro Co. (NYSE: SMG).

After a strong start since inception in April 2017, the fund reached a 52-week high of $27 last October, up about 170% since inception. However, it’s been a bumpy ride since then with the fund dropping 40% in the three months ending Dec. 31. For 2018 overall, the fund suffered a loss of about 20%.

There is no doubt the market for marijuana will grow substantially, with conservative estimates for the size of the total market at just shy of $6 billion in annual sales. However, it’s too early to rely on these estimates. The market is crowded, consolidation is underway, and valuation levels have reflected extreme optimism.

For example, the recent price-to-forward earnings ratio of Canopy Growth, the second-largest holding in the ETF, is -400 times (meaning the company is trading on huge expectations of future earnings while currently posting a loss). And it’s not unique. Clearly these valuation levels are unsustainable.

I don’t currently view this sector as an “investment,” but rather as a trade or speculation. However, most investors will want to steer clear until the dust settles and more reasonable fundamentals are demonstrated.

For those looking for a one-ticket diversified portfolio in this sector, the Horizons ETF is a good option. But again, with the current risk profile of the sector, it is clearly not something I’d recommend for everyone.

Horizons Marijuana Life Sciences ETF
Fund company: Horizons ETF Management
Fund type: Sector Equity
Style: Small Cap Growth
Risk level: High
RRSP/RRIF Suitability: Poor
Manager: Horizons ETF Management
MER: 0.94%
Trading symbol: TSX: HMMJ

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.