The first ETF offering exposure to the global cannabis market launched in the US in 2015. Since then, another eight products have come to the North American market all competing for the top spot.
The first to come to the market was the ETFMG Alternative Harvest ETF (MJ). At its peak, it saw its assets under management surpass $1bn.
MJ's assets have more than halved since then but it has proven there is investor appetite for exposure to the cannabis market.
It was not until 2020 that the European ETF market saw its first cannabis product in the form of the Medical Cannabis and Wellness UCITS ETF (CBDX).
CBDX was the result of a collaboration between Canadian ETF provider Purpose Investment and white label ETF provider HANetf.
However, just like London buses, Europe was introduced to a second product just a few weeks later. The Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR) was launched by newcomer Rize ETF.
In Canada and across numerous states in the US, cannabis is legal for both medicinal and recreational use, making it a lot easier for investors to incorporate it into their portfolios given it is more socially acceptable.
In Europe, very few countries have legalised the recreational use of cannabis, making it a difficult challenge for the two issuers to ensure no lines are being crossed between legal medical use and illegal common use making it legally accessible for the whole of Europe.
ETFMedical Cannabis and Wellness UCITS ETF (CBDX)Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR)AUM$7.1m$856kBenchmarkMedical Cannabis and Wellness Equity IndexFoxberry Medical Cannabis and Life Sciences IndexTotal expense ratio0.8%0.65%Inception date09/01/202012/02/2020
Investment strategy
CBDX tracks the Medical Cannabis and Wellness Equity index, managed by Solactive. It measures the performance of publicly listed companies with significant business in the medical cannabis, hemp and CBD industries.
It currently has 16 constituents and in the three months the fund has been listed, one constituent has been removed and four others have been included.
Namaste Technologies was removed from the fund after chocolate manufacturer Choklat, a company Namaste holds a 49% equity position in, received a license to produce cannabis-infused chocolate bars, drinks and sugar.
CBDX offers exposure to companies listed in only two countries, the US and Canada, which have 86% and 14% weightings, respectively. However, one of its top holdings, GW Pharmaceuticals, is a UK based company but is listed in the US.
Its largest holding is Corbus Pharmaceuticals Holdings, synthetic oral endocannabinoid-mimetic drug provider, with 13.4% weighting ahead of ScottsMiracle-Gro with 12.6% and the aforementioned GW Pharmaceuticals with 11.3%.
FLWR tracks the Foxberry Medical Cannabis Life Sciences index which provides exposure to the medical cannabis industry, similar to CBDX, as well as the cannabis-related life sciences sector.
FLWR has significantly more holdings with 27 constituents and has also included four more companies into its portfolio since its inception.
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FLWR also offers a more global exposure in addition to the US and Canada. The US remains the largest exposure with 72.7% but the second largest is the UK with 15.5%. Canada is the seventh largest exposure at 1% behind Switzerland with 2.8%, Australia and Ireland with 2.6% and Israel with 2.5%.
It has three holdings with exposure greater than 15%: Arena Pharmaceuticals with 16.5%, GW Pharmaceuticals with 16.2% and ScottsMiracle-Gro with 15.3%. Therefore, these three holdings equate to 48% of FLWR with 24 other companies making up the remaining 52% which is a significant concentration as well as having 11 stocks less than 1% weighting each.
Figures
Due to the nature of these ETFs, they are typically more expensive than common passive products available.
FLWR has a total expense ratio (TER) of 0.65% whereas CBDX is slightly more expensive with a TER of 0.8%. CBDX’s fee could be because HANetf is a white-label platform and has not only the ETF concept and management fee for Purpose Investments, but also the servicing fee for HANetf’s platform.
CBDX has the larger AUM with $7.1m in assets ahead of FLWR which is yet to break through the $1m barrier at $856k.
According to data from Bloomberg, FLWR has an implied liquidity of $8.4m compared to CBDX's $1.9m, as at 22 April, a feature that shows how deep the liquidity is on the underlying and what the largest trade can be before it would impact the market being tracked.
The implied liquidity is calculated by taking 25% of the average daily volume for each stock and limiting the liquidity to the most restrictive stock.
Another key difference between the two products is their rebalancing periods. CBDX is rebalanced every quarter whereas FLWR is done semi-annually. This could impact the weightings and inclusion of FLWR given its rebalance is not as regular as CBDX. However, Rize says that it will cease investing in a security if the company begins illegal or non-compliant activities before the company is removed from the index at the next rebalance.
Performance
As both of the products are relatively new, there is only two months of historical data to compare them on. And even then, there is not much to distinguish between the two, especially when there was a global economic crash in those two months.
Since FLWR’s inception, it has fallen 12.9%. For the same period, CBDX fell 25.9%. This included one month of negatively trending performances for the cannabis market and one positively trending month.
Between the beginning of April and 20 April, CBDX has climbed 7.2% but FLWR still managed to outperform with a positive performance of 13.3%.
Conclusion
HANetf has launched CBDX on behalf of Purpose Investments, a Canada-based ETF issuer that already has a cannabis product launched in Canada under the ticker MJJ. Its European product has already gathered more in assets in two months than the Canadian product has in over two years.
MJJ is actively managed and therefore Purpose Investments is able to provide its own analysis for its European counterpart.
Rize ETF is a newcomer to the European industry and was co-founded by four former employees of Legal & General Investment Management and focused on thematic ETFs.
FLWR was built in collaboration with New Frontier Data, Washington-based cannabis research and analytics firm which covers the global cannabis market.
Both products have their benefits and specialities, however, having an absolute return hat on, FLWR seems to offer more. As a result of its lower fees, larger and more geographically diversified portfolio, it has outperformed CBDX during the recent volatile period.
There is still plenty of potential for growth in the cannabis market so it is difficult to say which of these two products will benefit the most. Both products are showing positive signs this side of the volatile period seen in March, even more so for FLWR.
Given there are nine competitively matched products in North America, there is no doubt there will be more cannabis ETFs coming to the European market that will look to underprice and outperform both CBDX and FLWR in the future.
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