Time for advisors to get informed on pot investments

Recreational marijuana is now legal across Canada and ignoring this burgeoning sector is no longer a viable option for advisors

Time for advisors to get informed on pot investments

It’s official. Recreational marijuana is now legal across Canada and ignoring this burgeoning sector is no longer a viable option for advisors, regardless of their own personal views.

One thing’s for sure: Even if advisors aren’t looking into the marijuana investment space, many of their clients certainly are. The sector has caught the imagination of Canadian investors. People feel strongly about the industry and many clients are now encouraging their advisors to seek marijuana-based opportunities.

“At first, when we launched the Horizons Marijuana Life Sciences Index ETF (HMMJ) in April 2017, advisors were a little hesitant to purchase the ETF,” says Mark Noble, SVP and Head of Strategy, Horizons ETFs.

“Initially, a lot of the interest was coming directly from end investors, but over the past eight to nine months, we have seen a great deal of interest from advisors,” Noble explained. “Clients are driving conversations and advisors are being forced to act. Clients are saying they want to be invested in this space and it is the advisor’s job to do their due diligence to work out how it fits into the portfolio.”

Mr. Noble understands the reticence of some advisors to make investments in the marijuana space. There remains legal uncertainty around U.S. regulation and valuations are also creating a question mark for cautious investors.

“This is a highly volatile equity space and advisors’ default should be, rightly so, to look at the risk of each investment,” Noble says. “When you have something that can generate 200% returns and then 40% pullbacks in a matter of weeks, it is clearly something advisors need to be cautious about.”

The marijuana industry has been a boon to the Canadian securities market over the past 18 months, but Noble believes that many of Canada’s weed stocks have already priced-in the opportunities that will be created by legalization. The general consensus is that the recreational market in Canada will generate somewhere in the range of $4.5-$6 billion in sales each year. But, currently, the market has priced-in something more along the lines of an $8 or $9 billion market, which would put marijuana sales in Canada on par with beer sales.

“As popular as marijuana might be, I have a hard time believing that in the first year or two, people will be consuming more marijuana than alcohol,” Noble says. “So, advisors need to be weary. Canada is providing a template for other G7 countries to follow, and going forward, I think the best opportunities will be in companies outside of Canada. There could well be some disappointment in the revenues that are generated by some Canadian licensed producers.”

Ultimately, advisors need to conduct the same type of analysis on weed stocks that they use for any other investment sector. In the absence of real revenues and earnings, advisors need to realize that volatility in the marijuana sector will continue to be high.

“This is a high-risk/high-return sector and advisors need to examine each client’s investment goals to see if they match up,” Noble says. “It can be difficult to tune out the noise of people making millions in these investments, but they are making millions on investments made a long time ago. Advisors need to tread carefully and analyze every opportunity with caution.”

Download this whitepaper to find out more about marijuana investment opportunities and how to access them through Canadian ETFs.

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