The Year In Marijuana ETFs

(ETF.com) 2019 was an eventful year for marijuana ETFs.

The space welcomed seven new funds, including two new exchange-traded notes that debuted on Wednesday, while also bringing in more than half a billion dollars combined in new assets under management (AUM).

Yet as the year progressed, flows into cannabis ETFs began to slow considerably. Stock prices fell, exacerbating the slide. Since this summer, newer ETFs have struggled to attract much money beyond seed capital, and the ETFMG Alternative Harvest ETF (MJ), which once topped $1 billion in AUM, now stands at just $698 million, almost half its peak AUM.

As of Dec. 9, before the two ETNs launched, the market's six existing cannabis ETFs had seen $679 million in new net assets year to date:

Source: ETF.com; data as of Dec. 9, 2019

Most of the money flowed into the sector's largest fund, the ETFMG Alternative Harvest ETF (MJ), which alone brought in $549 million. But the AdvisorShares Pure Cannabis ETF (YOLO), the space's second-mover, also had a strong haul this year, totaling $80 million.

However, flows began to slow by July, which in retrospect made for poor timing to launch The Cannabis ETF (THCX), the Amplify Seymour Cannabis ETF (CNBS) and the Cambria Cannabis ETF (TOKE). These three funds, as well as the Global X Cannabis ETF (POTX), which launched in September, have struggled to accrue meaningful assets; combined, the four have brought in only $51 million since their launches.

Sector Pullback Slows Investment

Unsurprisingly, the dry-up in new flows coincides with tanking performance in the cannabis industry at large (read: "Dude, Where's My Pot ETF Returns?").

Investor hype around cannabis had soared last year after Canada, the de facto seat of the burgeoning marijuana industry, became the second country in the world to fully legalize marijuana for all medical and recreational adult usage. Many investors expected this legalization would let loose a flood of untapped demand, driving revenues for cannabis companies sky-high.

In reality, however, the sector plunged in 2019 after weaker-than-expected earnings from several major cannabis companies, including Canopy Growth, Aurora Cannabis and others. Many cannabis companies had over-expanded, ramping up too quickly or with a lack of adequate financing; thus, by the end of the year, they found themselves enacting layoffs and other cost-cutting measures (read: "Marijuana ETFs Slide In Rough Summer").

A health scare in which thousands of people using vaping devices contracted a serious and potentially fatal disease also had significant impact on stock prices of marijuana-related companies.

Over the course of 2019, many individual stock prices have fallen by double digits. For example, year to date, Canopy Growth has fallen 32%, Aurora Cannabis has fallen 52% and Tilray (TLRY) has fallen 74%.

All together, these factors have made marijuana one of the worst-performing sectors of 2019; MJ, the only fund with a track record longer than one year, has lost 30% year to date.

(For a larger view, click on the image above)

Source: Koyfin; data as of Dec. 11, 2019

Custodian Banks Tiptoeing

However, it's not all gloom and doom for the cannabis industry—or for funds that would track it. In November, the U.S. House Judiciary Committee approved a bill that would, among other actions, declassify marijuana as a Schedule I drug, effectively ending the federal prohibition on its usage, and giving banking institutions more leeway to finance marijuana-related businesses.

If the bill becomes law, it would enact wide-sweeping criminal justice and financial reforms. But for the ETF industry, the most relevant change likely would be that federally chartered and licensed banks would suddenly have more leeway to custody marijuana stocks for funds.

Until recently, most custodian banks wanted nothing to do with cannabis stocks, but over the past year, we've seen some institutions changing their tune. Brown Brothers Harriman custodies TOKE and POTX, for example, while the Bank of New York Mellon serves as custodian for YOLO (read: "Challenge Of Launching Cannabis ETFs").

A full de-scheduling of marijuana would likely entice other custodian banks into the fold, as well.

Optimism Remains

As such, ETF issuers appear to remain optimistic about the sector as a whole, if filings are anything to go by.

In August, AdvisorShares filed for a second marijuana ETF that would focus entirely on U.S. stocks (read: "1st US Focused Cannabis ETF Proposed").

Then, earlier this week, REX Shares launched two marijuana-focused ETNs, including the sector's first leveraged product, the MicroSectors Cannabis 2x Daily Leveraged ETN (MJO)(read: "Leveraged Cannabis ETN Launches")

Unless flows pick up soon, however, the eight [LLB1] cannabis ETPs on the market will be forced to fight for scraps. Indeed, the next race facing the sector may be which product will be first to close.