This aggressive cannabis ETF offers a 5.5% dividend yield

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Marijuana Producer

One way to cut your exposure to any individual cannabis or related company is to buy an ETF. While this particular fund is focused on marijuana, it currently holds 58 different stocks, with an upper limit of 10% for any one individual security. At the same time, it aims to generate substantial income by lending its stock holdings to short sellers.


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HORIZONS MARIJUANA LIFE SCIENCES ETF $19.99 (Toronto symbol HMMJ; Units outstanding: 44.4 million; Market cap: $887.6 million; TSI Cannabis Quality Rating (CQR): www.horizonsetfs.com) invests in North American firms that are legally involved in the cannabis industry.

The fund tracks the North American Marijuana Index, which weights its stocks by their market cap and sets an upper limit of 10% for any one stock. Canadian companies make up roughly 80% of the ETF’s portfolio, the U.S., 12%, and the U.K., 8%. The fund invests in cannabis growers and cultivators as well as bio-pharmaceutical companies and support firms such as lighting technology and fertilizer companies.

Despite its 58 different stocks, the ETF’s holdings are still highly concentrated in growers: the top six producers, alone, make up almost 50% of the overall assets.

The top 10 holdings are Aurora Cannabis (Canada, 10.9%), Canopy Growth (Canada, 10.8%), Tilray Inc. (Canada, 8.8%), %), GW Pharmaceuticals (U.K., 7.7%), Cronos Group (Canada, 7.8%), Aphria (Canada, 7.5%), Scotts Miracle-Gro (U.S., 7.1%), Hexo Corp. (Canada, 3.9%), Charlotte’s Web Holdings (U.S., 3.0%), and Organigram Holdings (Canada, 2.9%). The fund is rebalanced each quarter.

The ETF launched in April 2017. It charges a relatively high MER of 0.75%, but has a reasonable size. An average of $25 million in units trade daily, which provides ample liquidity.

The fund has gained 52.5% since the start of this year, while the broad-based S&P/TSX Composite Index rose 15.5%.

Most of the stocks that the ETF holds don’t pay dividends. However, Horizons earns money by lending those stocks to short sellers. The short sellers then sell them, hoping to buy them back later at a lower price.

Thanks to those income source, the ETF has now paid seven variable quarterly distributions since October 2017. The trailing 12-month total payment of $1.10 yields a high 5.5%. However, cash inflows from short sellers are highly volatile and the ETF’s distributions (and yield) could suddenly drop.

The Horizons Marijuana Life Sciences ETF has a 3-Leaf Cannabis Quality Rating (CQR).

For investors who want exposure to marijuana markets, this ETF cuts the risk of investing in individual cannabis stocks. That also means it holds stocks that we do not like. The ETF is a speculative buy for aggressive investors who want exposure to the marijuana industry.

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