ETF: cannabis that doesn’t get you high
It would be an understatement to say that the cannabis industry didn’t need a pandemic to endure its own existential crisis. The lack of profitability characterizes a large number of listed companies active in the production and marketing of cannabinoids derived from hemp (CBD). And this, despite the regulatory advances of the past two years. The United States, for example, reformed its legal framework with the implementation of the Agriculture Improvement Act passed in 2018. This authorizes the production of CBD derived from hemp for medical use, which contains no more than 0 , 3% tetrahydrocannabinol (THC) compared to 50 to 100 times more for the CBD derived from marijuana.
Up more than 410% since its initial public offering (IPO) in 2014, the North American share of indoor and greenhouse cultivation specialist Canopy Growth, the first company in the world to be listed, has indeed collapsed by 50% in the past year (as of July 28, 2020). The group recorded a loss of nearly a billion dollars in the fourth quarter of fiscal 2020. Its competitor Aurora Cannabis has lost more than 85% over the past year.
Listed on the stock market the same year as Canopy Growth, Aurora Cannabis has completely erased its gain of more than 1100% accumulated until mid-October 2018. Since its IPO, this is only 5%. Reflecting the lack of profitability of cannabis companies, the exchange-traded fund Horizon Marijuana Life Sciences ETF, which contains these two constituents, has lost more than a third of its capitalization since its launch in late April 2017. It remains down by 17% since the start of the year.
“Several companies operate in the wellness segment and whose fall in demand linked to Covid-19 has stabilized valuations,” explains Nawan Butt, portfolio manager of the highly concentrated passive fund HANetf The Medical Cannabis and Wellness Equity Index ETF ( CBDX). “The second quarter earnings season will give us a better idea of their growth rates during tough times, especially at retail.” The difficulties facing the sector have not, however, prevented investors from continuing to finance projects and turning to funds offering exposure to the cannabis industry.
Launched in January in London, the CBDX fund has been available in Swiss francs on the SIX Swiss Exchange since last month. It contains a significant portion of so-called ancillary companies to the cannabis industry, many considered to be full-fledged pharmacies and biotechs. The 13 positions give access to nine sub-themes and focus on companies whose main players technically need to comply with regulatory requirements, in this case very strict, in terms of industrial processes.
These are American companies such as GrowGeneration, a specialist in hydroponics (soilless) techniques, which accounts for 8.14% of the fund. The company managed to raise $ 42 million during the pandemic, as the equity issue was oversubscribed more than five times. Unlike the aforementioned large groups, growth company GrowGeneration posted record revenues in the first quarter. We should also mention the real estate investment trust (REIT) Innovative Industrial Properties (IIP), whose weight is almost 11% of the CBDX. IIP saw its revenues increase 210% in the first quarter and even paid a dividend of one dollar, up 122% annually. IPP, which finances the real estate assets of CBD producers and labs, raised $ 239 million in January, the issue of which was three times oversubscribed.
The first line of the fund goes to Amerys (11.48%), a Californian biotech which announced in March a better efficiency of its Neossance, a CBD-based emollient for dermatological applications. It is followed by Corbus Pharmaceuticals (11.28%), listed on the Nasdaq, whose cannabinoid receptor produces an anti-inflammatory effect. This receptor is also intended for the treatment of fibrotic disorders.