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Legalization trend drives cannabis ETFs to significantly grow

More and more US states are legalizing the use of cannabis. The trend around the plant is not only boosting individual stocks from the cannabis sector, which is characterized by mergers and acquisitions, but also ETFs that track the sector. While cannabis ETFS have seen a significant jump in prices since the beginning of the year, their performance has been anything but stable.

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After stocks such as GameStop and AMC were catapulted to unimagined price heights in the Reddit community “WallStreetBets” in January, online users had set their sights on a new target in early February with numerous cannabis stocks. But even before the net hype, the prices of stocks like Tilray, Aphria, Canopy Growth, and Aurora Cannabis jumped, making the industry another major trending topic on the stock market, as also reported by Deutsche Presse-Agentur. 

The increased demand for the industry is not only noticeable in individual stocks, but also in corresponding investment funds. For example, the three best-performing ETFs this year all have in common that they track the cannabis industry, according to a report by Bloomberg. According to the news agency’s analysis, the Global X Cannabis ETF, the Cannabis ETF (THCX), and the Amplify SeymourCannabis ETF have already posted returns of more than 90 percent year-to-date, significantly outperforming the S&P 500.

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Legalization well underway in the U.S.

Strong stock price gains are also raising hopes that cannabis will soon be legalized in the U.S., Bloomberg further reported. For example, Andrew Cuomo, the governor of New York, recently came out in favor of legalizing cannabis in his state, he said. He added that the Democratic majority in Congress is also optimistic about approval. 

According to a November 2020 NBC evaluation, cannabis may be used for recreational purposes in 15 U.S. states. Medical use is allowed in a total of 34 states. If more states follow suit here, this could significantly boost demand, according to Todd Rosenbluth of CFRA Research, making cannabis companies significantly more profitable. But the industry can also benefit from rising expectations for company earnings growth and a large number of mergers and acquisitions, according to Bloomberg analyst Kenneth Shea.

Tilray and Aphria impress with strong sales figures after merger announcement

Currently, the most popular example of the merger wave in the cannabis industry is the merger of industry giants Tilray and Aphria. In December 2020, the companies announced the merger, which is expected to be completed in the second quarter of 2021 and give the two a combined market share of nearly 20 percent. Tilray and Aphria also became targets of recent Reddit hype, according to Bloomberg, but also have strong quarterly results to thank for their share price breakouts. 

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While Aphria already presented its financial statements for the second fiscal quarter that ended at the end of November in January, exceeding analysts’ expectations, Tilray thrilled investors in mid-February with sales figures for the fourth fiscal quarter of 2020 that exceeded experts’ outlooks. Both companies subsequently benefited from rising share prices. They not only make up a large portion of the Global X Cannabis ETF, but also the billion-dollar ETFMG AlternativeHarvest ETF.

Canopy Growth and Aurora Cannabis also in demand

Shortly before, competitor Canopy Growth also presented figures. The Canadian cannabis company suffered a significant loss per share in its most recent third quarter, but was able to score in terms of sales and even exceeded analysts’ estimates. 

At Aurora Cannabis, meanwhile, the loss was lower than expected, but in terms of sales, the competitor fell short of expert expectations. Both companies are also included in the Global X Cannabis ETF.

Industry characterized by high volatility

While cannabis ETFS have seen a significant jump in prices since the beginning of the year, their performance has been anything but stable, as Bloomberg summarizes. For example, while funds have risen in 2018 after the legal situation in Canada and the U.S. partially loosened, cannabis producers have subsequently struggled with low returns, seen as a result of weak quarterly reports, a slow legalization process, and difficulties in assembling product portfolios. 

“It seems like the cannabis space is a whirlwind: You can have some great return periods and others that are more difficult,” UBS strategist for ETFs David Perlman also believes. “It’s an area where you have to expect volatility, and you really have to look at the ETF to make sure you’re getting the names you want.”

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Eva Wesley is an experienced journalist, market trader, and financial executive. Driven by excellence and a passion to connect with people, she takes pride in writing think pieces that help people decide what to do with their investments. A blockchain enthusiast, she also engages in cryptocurrency trading. Her latest travels have also opened her eyes to other exciting markets, such as aerospace, cannabis, healthcare, and telcos.