Global X expands thematic family with cannabis ETF

Sep 19th, 2019 | By | Category: Equities

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Global X has added a fifteenth fund to its ‘Thematic Growth’ family of ETFs with the launch of the Global X Cannabis ETF (POTX US) on Nasdaq Exchange.

Global X joins the cannabis party with new thematic ETF

The Global X Cannabis ETF (POTX US) becomes the seventh cannabis-focused ETF to launch in the US.

The fund tracks the Cannabis Index, calculated by Solactive, which offers a play on the cannabis theme by covering firms that attribute at least 50% of their revenue, operating income, or assets to the marijuana industry.

To be eligible for selection, a firm must be listed on a developed market stock exchange globally, pass certain liquidity thresholds, and have a market capitalization of at least $100 million.

Potential holdings include companies that are involved in the production, growth, and distribution of cannabis including industrial hemp, as well as companies operating in other areas of the cannabis industry, such as those involved in pharmaceutical applications or those that provide financial services to cannabis producers.

Firms must adhere to all applicable national and local laws, including US federal, state, and local laws to make it through to the index.

The index is weighted by free float-adjusted market capitalization subject to a 10% cap on firms that are not yet generating revenue. Reconstitution and rebalancing occur on a quarterly basis.

The index currently contains 25 constituents and is heavily tilted towards Canadian firms at 81.4% of the total index weight, followed by companies listed in the US (10.9%) and the UK (8.0%). Pharmaceutical firms account for the vast majority of the industry exposure at 91.1%. The largest single constituents are Canopy Growth (8.9%), Aurora Cannabis (8.5%), Aphria (8.4%), Cronos Group (8.3%), and Hexo (8.2%).

The fund distributes income to investors on a quarterly basis.

Low cost in a crowded field

The fund’s launch brings the number of cannabis ETFs in the US to seven. Within this crowded field, Global X appears to be competing on cost. The fund’s relatively low expense ratio of 0.50% makes it the cheapest passively managed cannabis ETF in the US. Most comparable marijuana-focused ETFs charge fees in the region of 0.75%, such as the $890m ETFMG Alternative Harvest ETF (MJ US).

Investors can, however, obtain cheaper exposure to the industry through the actively managed Cambria Cannabis ETF (TOKE US) which costs 0.42%. This ETF has a global mandate and holds between 20 to 50 securities from across the market cap spectrum that have operations linked to the cannabis industry.

Potential for growth

Revenue derived from legal cannabis is expected to reach $14.9 billion in 2019, representing 36% year-over-year growth, according to cannabis research firm BDS Analytics; however, Global X believes that growth could accelerate as recreational use becomes legalized in additional jurisdictions.

Global X highlights the example of Colorado, which legalized recreational retail distribution of cannabis at the state level in 2014, and subsequently grew monthly cannabis-related revenues from an initial level of $14m per month to $122m by July 2019.

Pedro Palandrani, Research Analyst at Global X, commented, “The cannabis industry is growing rapidly, with wide-ranging potential applications. With our Thematic Growth ETFs, we are hyper-focused on providing high quality, targeted access to investable emerging trends to accurately capture their future growth potential.

“Cannabis provides a unique opportunity to access a trend in its nascent stages, driven by advancements in medicinal and industrial uses, but with further upside potential given increasing efforts to legalize recreational use. As regulations evolve, we may see the emergence of enormous regulated markets, and we are thrilled to help a broad range of investors navigate this theme in a rigorous and compliant way.”

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