Will Horizon's pot ETF give investors a good high—or a bad trip?

The new ETF’s holdings, focused on the marijuana sector, may be too speculative and not diversified enough

Will Horizon's pot ETF give investors a good high—or a bad trip?

ETFs are sought by investors because they promise diversified exposure to different companies. An ETF focused on a particular sector is, understandably, riskier, but the risk could be worth it if the sector provides more lucrative returns.

The question for Horizons ETFs’ marijuana-oriented HMMJ, therefore, is whether it offers what pot proponents might call a good strain — and it may actually not.

“[HMMJ] closed Wednesday at $10.25, up 2.5% from its debut,” according to the Globe and Mail. The fund is a world first, providing diversified exposure to Canada- and US-listed stocks involved with medical marijuana bioengineering and production.

One of the ETF’s major holdings is Scotts Miracle-Gro, which has a 10% weighting in the fund. The venerable and profitable home and garden company—with a market cap of US$5.5 billion—has moved into the marijuana market by buying up companies that provide equipment and materials for marijuana growers.

Other fund holdings, though, are highly speculative, with small market capitalizations and share prices driven into extreme multiples by the ongoing frenzy in the cannabis sector. The $850-million company Aurora Cannabis, also with a 10% weighting in the fund, has not yet turned a profit; assuming it meets forecasts for the next year, its shares trade at 35-times profit.

Alphria, valued at $900 million, has a price-to-earnings ratio of 190. Supreme Pharmaceuticals — a company that hasn’t been and is not expected to be profitable — has seen its share price rise 365% over the last 12 months. Canopy Growth’s 150% rise in share price since October has taken it to a valuation that’s 330 times its expected 2018 profit.

“The marijuana ETF certainly gives investors a relatively broad group of companies, taking the guesswork out of picking a winner,” the article said. “[But] even as a group, these stocks are highly speculative, given the backdrop of steep valuations, low- to non-existent profits and a hard-to-define competitive edge.”

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