XP Investimentos launches a new cannabis investment fund

The cannabis market is an emerging market and thus particularly susceptible to risk. This has typically caused stock price fluctuations to be higher than the average of the American and Brazilian markets. Despite this the company believes that a proper investment vehicle could help minimize the inherent risks of the cannabis sector.

HEMP.IM is a mobile app exclusively dedicated to cannabis news. Application also covers the entire spectrum of companies involved in the hemp industry, including hemp stocks listed in the US, Canada, and other markets.

Cannabis market growth

Evidence of the health benefits generated by some medical cannabis-based products is growing. The interest of investors in trying to take advantage and profit from this revolution is growing. This influx of funds could significantly increase the growth of the sector in the coming years.

This will depend not only on the speed of research progress but mainly on the regulation of the subject in the main countries that explore its commercialization. Among the main medical applications of the products of this industry, the treatment of epilepsy, cancer and pain control, among others, are well documented.

It is estimated that the global cannabis market may grow by around 20% per year in the next 5 years, at least, with the consequent relevant potential for exploitation by companies in the sector.

How to access the cannabis market?

Seeking to give Brazilian investors the opportunity to expose themselves to this still incipient but very promising market (although surrounded by great regulatory risks), XP created the allocation vehicle Trend Cannabis FIM.

Aimed at General Investors, Trend Cannabis will passively invest in an “ETF” (an exchange-traded fund) listed in the United States called ETFMG Alternative Harvest or, briefly, “MJ” (its stock exchange code).

Managed by ETFMG, it is currently the largest and most liquid ETF connected to the Cannabis sector in the United States.

ETF MJ fund

The fund will invest globally in shares of companies directly or indirectly related to the process of legal cultivation, production, marketing or distribution of cannabis products for both medical and non-medical purposes. Additionally, it may invest in pharmaceutical companies that produce, market or distribute medicines that use cannabidiol derivatives (cannabinoids).

Companies eligible to enter the MJ portfolio must have more than 50% of the revenue linked to activities related to the cannabis industry. Some data from the ETF:

• Number of companies in the portfolio: approximately 40
• Quarterly portfolio re-balancing
• Almost 90% of the portfolio is concentrated in companies from three countries: Canada (~55%), United States (~27%) and England (~10%)
• 2/3 of the investments in stocks of the Pharmaceutical sector and about 20% in the Tobacco sector 

As more ETFs linked to the cannabis industry grew in terms of net worth and acquired relevant liquidity, they will be eligible to be part of the Trend Cannabis portfolio, further pulverizing their allocations. As currently, only MJ has passed its liquidity filters, the portfolio will start with full allocation in this ETF.

The risks

To invest in this product, however, it is important to be able to withstand significant risks. The vast majority of the companies in the MJ portfolio are vulnerable to policy changes. This coupled with the very early life stage of several companies make the stock price fluctuations a significant risk.

A reflection of this is the fact that the fund fell by more than 30% in the year (based on the closing of 11/29/2019) and had a loss of almost 63% if we take the difference between its maximum share (in mid-September 2018) and the minimum share (November 2019).

For the optimists and those who have an understanding of the risks associated with this sector, the current moment can be seen as a great entry point, with much cheaper actions!

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(Featured image by Andres Gomez via Unsplash)

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