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Know Your Medical Cannabis Exposure

The medical cannabis movement is rapidly shaking up the biotechnology, pharmaceutical and wellness sectors. Today, the market is buoyed by powerful tailwinds, including favourable legislation, rising social acceptance, a flurry of public and private investment and an already proven range of therapeutic applications. We are in the early innings of what we believe to be a multi-year tailwind for the industry, as stigma is dispelled and the cannabis plant reroots itself in modern medicine. For investors, this presents an exciting investment opportunity. With liberalisation, legalisation and medicalisation ramping up at an unparalleled pace, we expect to see multiple expansion in the companies that are poised to benefit.

But just how can investors get exposure to the medical cannabis sector today? And what should they be looking out for when choosing an ETF that is right for them? In this piece, we unpack our PLANT methodology, which describes not only the various things we thought about in constructing our ETF, but which can also serve as a helpful guide for investors looking to evaluate different offerings.

 

The PLANT methodology

The PLANT methodology outlines a five-step guide to analysing medical cannabis exposures (Permitted, Liquidity, Active, North America and Tobacco). The methodology is designed for professional investors who wish to invest in the burgeoning medical cannabis sector.

 

Consideration #1

Understand whether or not your exposure is Permitted by anti-money laundering (“AML”) regulations in your jurisdiction. A good starting point is to deconstruct a cannabis exposure into its various sub-sectors. Broadly speaking, the cannabis industry (Note: here we are NOT talking about the medical cannabis industry specifically) has seven key sub-sectors: Biotechnology/Pharma, Big Pharma, Hemp & CBD, Agri-Tech & Supplies, Ancillary Products, Ancillary Services and Cultivation & Retail. While the first four sub-sectors apply to the ‘medical’ cannabis ecosystem, the latter three do not. And hence any well-built exposure targeting the medical cannabis sector specifically should exclude these three sub-sectors. This is because all three of these sub-sectors are intricately tied to ‘recreational’ or ‘adult-use’ cannabis, and investing in companies engaged in recreational cannabis is not permitted for UK-based investors due to the stringent AML regulations in place in the UK.

For all European investors (UK and EU), a crucial point is also understanding whether the companies you are investing in are operating legally in their relevant countries of operation. We have seen examples of US-based companies operating legally at state levels, but not at the US federal level. Investing in such companies is prohibited in both the UK and EU and investors need to pay attention to what they are holding to avoid inadvertently falling afoul of AML regulations relating to their investment activities. For further information, please get in touch with us or take a look at our Rize Global Medical Cannabis Exclusion List where we have highlighted some companies that are problematic.

Consideration #2

Understand your portfolio Liquidity. Here we are specifically talking about the liquidity of the stocks in an ETF, not the liquidity of the ETF shares themselves (Note: ETF shares trade on exchange). In a sector that is still very new and growing, like medical cannabis, and in which the universe of eligible stocks is smaller than for more established themes, managing liquidity risk in your portfolio is important. We contend that the most appropriate way to invest in the medical cannabis sector today is to do so with a focus on each stock’s liquidity.

 

Consideration #3

Understand whether the stock universe feeding the index/ETF is Actively researched. Today, it has become commonplace for ETF providers to license indices “off the shelf” from the major “usual suspect” index providers when creating a thematic ETF. This contrasts to a newer approach used by other ETF providers (including Rize ETF) to manufacture indices in-house on a tailor-made basis (typically in partnership with some sort of a sector/theme research firm), a process that takes many months and results in a more carefully curated portfolio of companies. It is therefore critical that investors distinguish between exposures that are tailor-made and those that are not. As pertains to Rize ETF, our work in the medical cannabis sectors leverages the research and analytical insights of US-based New Frontier Data, the world’s leading cannabis industry intelligence firm.

 

Consideration #4

Understand whether the ETF invests globally or in North American equities only. The majority of cannabis-themed ETFs in the market today invest almost exclusively in North American equities. However, by now, smart allocators will know that the medical cannabis opportunity is global. Today, we have precisely 68 countries where cannabis is now legal for medicinal use.[1] And the market is rapidly expanding. As such, any exposure to the medical cannabis sector must be global if it is to accurately represent the medical cannabis opportunity as it exists today. It should not discount developments in countries like Australia, Israel, Hong Kong, Thailand, Switzerland and Colombia all of which now burgeoning markets. To be clear, we invest globally here at Rize ETF.

 

Consideration #5

Understand if there is any Tobacco exposure (or other problematic exposures) in the ETF. Unfortunately, a number of cannabis exposures out there will invest in tobacco names such as 22nd Century Group and Turning Point Brands. Needless to say, these companies have nothing to do with the global medical cannabis opportunity and should therefore be excluded in a medical cannabis exposure that is built right. Moreover, for an ESG conscious investor, exposure to such names poses other risks, especially where they may be inadvertently getting exposed without knowing they are.

 

Related ETF

FLWR: Rize Medical Cannabis and Life Sciences UCITS ETF

 

References:

[1] New Frontier Data, “New Frontier Data’s Analysts Offer Predictions for the Year Ahead”, January 2021. Available at: https://newfrontierdata.com/cannabis-insights/new-frontier-datas-analysts-offer-predictions-for-the-year-ahead/

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