Investors are always attracted to sectors that will help them reach their financial goals faster and beat the market trend. For some time now, the technology sector has been a lucrative option that promises high returns. The Canadian government legalized cannabis in October 2018, making investors wonder if investing in pot stocks is the next big thing.
Rather than investing in marijuana stock companies directly, you could also choose the ETF route for investments. Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) is a Canadian ETF focused on cannabis companies that you can consider right now.
HMMJ: Your Route To Investing In Cannabis Stocks
HMMJ is an exchange-traded fund (ETF) incorporated in Canada. The ETF is an index fund which means it is passively managed. The fund aims to provide exposure to a host of publicly listed companies with business interests in the cannabis industry.
HMMJ seeks to mirror as much as possible the performance of the North American Marijuana Index. The fund investment comprises 74% investment in Canadian companies, 16% in American firms, and 10% in UK-based companies.
If you had invested in this ETF a year back, you would have earned a profit of over 100%. The stock rose from CAD 5.80 on April 6th, 2020, to CAD 12.27 on April 1st, 2021.
The Ups and Downs of Investing in HMMJ
The advantage of investing in Horizons Marijuana Life Sciences ETF is that it provides you with exposure to diverse companies in the cannabis industry, which reduces your risk of investing in a single stock.
Rather than researching an individual stock, an investor could choose to invest in a cannabis ETF with a long-term view. This helps the investor to withstand the volatility that might be inherent to individual stocks.
As the marijuana industry evolves and expands rapidly, HMMJ rebalances its portfolio after each quarter. HMMJ does not invest in Index constituents engaged in the distribution and cultivation of cannabis in the U.S, where these activities are not legal at the federal level.
The high annual fee charged by HMMJ is a downside of investing in the ETF. The market capitalization of most of the pot stocks is high in comparison to their historical sales. The valuation is based on the high growth potential expected in the industry and carries significant risks.
Investing in Cannabis Stocks
Experts believe that the cannabis industry will see some significant advances in the year 2021. The momentum building up for legalizing marijuana in the U.S. could give the overall industry an impetus towards growth. However, at the same time, they feel that speculation and not fundamentals were the reason for the meteoric rise in some stocks in the early part of 2021.
Before investing in any stock or ETF, you need to assess your risk tolerance level. Marijuana stocks are a high-risk, high-return option. Investing in these stocks through the ETF route does reduce the risk levels but does not eliminate them.
The Bullish Takeaway
If you plan to invest in HMMJ or other marijuana stocks, start small. These investments should be a part of your overall portfolio; do not skew your investment in one direction.