When investors think about building wealth, the menu of choices is long. There are stocks, bonds, ETFs, mutual funds, real estate, annuities, and more. Each carries its own balance of risk and return. But among these, publicly listed equities have always held a certain allure. They are liquid, relatively easy to trade, and offer the possibility of compounding returns over decades. Of course, they also come with volatility and the chance of painful losses.
Within equities, investors can choose companies that reflect their own financial goals and tolerance for risk. A younger investor, with decades ahead in the workforce, might lean toward growth stocks that carry higher risk but also the potential for outsized gains. For those closer to retirement, income-oriented or defensive stocks can offer stability and consistent dividends.
In recent years, however, one sector has been impossible to ignore: cannabis.
Cannabis as an Emerging Investment Theme
The legalization movement has transformed cannabis from a shadow market into a legitimate, regulated industry. Countries such as Canada have fully legalized marijuana, while individual U.S. states have opened the door to medical or recreational use, despite cannabis remaining illegal at the federal level.
The excitement is backed by numbers. Statista projected that global spending on cannabis products would reach $29 billion in 2020 and climb to $63.5 billion by 2024. That implies a compound annual growth rate of about 24 percent, far outpacing many other consumer industries. For investors, that kind of growth story is enticing. But as with every emerging sector, opportunity comes with uncertainty.
A Nascent Industry with Growing Pains
The cannabis industry today is reminiscent of the internet boom of the late 1990s. At that time, investors rushed to pour money into any company with a “.com” in its name. The frenzy ended with a crash, wiping out most players. Only a handful survived and eventually grew into today’s giants like Amazon and Google.
Cannabis is experiencing a similar rush. Dozens of companies are competing to establish themselves as market leaders, but not all will make it. Predicting which firms will emerge as long-term winners is difficult. Many look promising on paper, but the road from startup to profitability is steep, especially in an industry facing complex regulations, high costs, and intense competition.
The Challenge of Capital-Intensive Operations
Cannabis is not a low-cost business. Licensed producers must build large-scale cultivation facilities that can support industrial-level farming. These operations involve sophisticated lighting, irrigation, and climate control systems. The upfront expense runs into the hundreds of millions of dollars, and that is before marketing, distribution, and compliance costs are factored in.
For many companies, losses are expected for years. They must achieve economies of scale before they can bring costs down enough to generate profits. In the meantime, most are burning cash rapidly as they reinvest to expand production and meet rising consumer demand. This is why the industry often appears on the surface to be booming but underneath remains financially fragile.
Dilution and the Struggle for Capital
Another complication for cannabis stocks is access to funding. Because marijuana is still federally illegal in the U.S., traditional banks and lenders remain hesitant to provide financing. That limits access to debt markets, which most companies in other industries rely on.
Instead, cannabis firms often turn to equity financing, issuing new shares to raise cash. While this keeps the lights on, it dilutes the ownership stake of existing shareholders. More shares in circulation mean each one is worth a smaller slice of the company. For retail investors, this can translate into a declining stock price even if the overall industry continues to grow.
ETFs as a Safer Entry Point
Given the structural challenges, should investors walk away from cannabis entirely? Not necessarily. For those who want exposure to the sector but prefer to spread risk across multiple companies, cannabis-focused exchange-traded funds (ETFs) are an option.
One of the best-known is the Horizons Marijuana Life Sciences ETF (HMMJ). ETFs allow investors to hold a basket of companies rather than betting on a single stock. This diversification reduces the risk of choosing a firm that fails to survive the industry’s shakeout.
As of 2020, HMMJ’s largest holdings included companies like Canopy Growth, Aphria, Cronos Group, GW Pharmaceuticals, and Innovative Industrial Properties. Together, these five accounted for about 63 percent of the fund. Each represents a different aspect of the cannabis ecosystem, from cultivation to medical research to cannabis-focused real estate investment.
While investing through an ETF may not deliver the rapid, exponential gains some individual stocks could theoretically provide, it does help protect capital when sentiment turns against the sector. For cautious investors, that balance may be appealing.
Investors should recognize that cannabis stocks today resemble the early days of the internet boom: full of excitement, but also uncertainty. Some firms may eventually become giants. Many others will disappear. For those willing to accept that risk, a diversified approach through an ETF may provide the safest way to gain exposure without placing all bets on a single name.
