Marijuana ETF Up 65% YTD; Industry Conditions Keep Improving

Cannabis stocks are soaring in 2021 and the fundamental backdrop for the sector keeps getting better.
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The cannabis sector has been the best-performing group of 2021 thanks to improving fundamentals, positive government legislative efforts and and increased merger & acquisition activity. All 7 major cannabis ETFs are among the top 25 performers year-to-date.

I received industry commentary today from Jason Wilson, cannabis and banking expert at ETF Managers Group, the issuer of the ETFMG Alternative Harvest ETF (MJ) with $1.5 billion in assets under management. He offers his thoughts on recent developments for cannabis stocks and the long-term prospects for the industry in general. His fund is already up 65% year-to-date.

Marijuana ETF Year-To-Date Performance (MJ)

Marijuana ETF Year-To-Date Performance (MJ)

He notes several factors behind the recent rally in cannabis stocks, including today's big news:

Jazz Pharma-GW Pharma Merger

"Jazz Pharma’s acquisition of GW Pharma, at a significant premium, demonstrates that pharmaceutical companies are recognizing the value and future potential of cannabinoid based medicines. It is also another example that the cannabis industry is continuing to normalize and evolve beyond the traditional cultivation of flower, with potential well outside of our borders. For investors, the acquisition of GW Pharma is another reminder that investing in cannabis touches many verticals globally, requiring a diverse approach beyond traditional cannabis cultivation companies."

Global Legislative Outlook

"Domestically, Senate Majority Leader Schumer has confirmed that cannabis reform legislation will be a key priority in the current Congress, and that it will include sensible tax and regulatory oversight at the federal level along with criminal justice reform."

"Globally, Mexico recently published its federal medical cannabis regulations, and the UN voted to remove medical cannabis from its list of dangerous narcotics."

Strong Revenue Growth Worldwide

"These recent catalysts occurred on the backdrop of strong global cannabis sales growth in 2020 (2020 global sales are expected to reach approximately $20 billion – an increase of approximately 35% versus 2019 sales of $15 billion) and suggest that the industry will continue to see strong growth and continued expansion domestically and globally for the foreseeable future."

Outlook

"MJ’s diversified cannabis portfolio has benefitted from these recent global and domestic catalysts (up 90%+ in the previous three months, 40%+ YTD), and remains well positioned to take advantage of what is expected to be one of the fastest growing global industries over the next decade."

My Thoughts

I've noted in my previous articles about the cannabis sector that I really like how it's finally developing a narrative. In the past, marijuana ETFs have mostly traded on potential, which led to wide price swings and boom/bust cycles.

Today, we've seen legalization and decriminalization of marijuana use growing across the United States (four measures passed in the November election alone). Medical cannabis use is also becoming more widely accepted.

The increased M&A activity is an encouraging sign and a trend that I expect will continue going forward. Aphria-Tilray was a marriage of two industry heavyweights, but the Jazz-GW merger shows that the industry is headed towards a consolidation into a handful of major players.

The revenue growth story has already been established. We're still in the nascent stages of marijuana becoming a more mainstream industry. While growth potential is quite high, so are valuations. While I'd prefer marijuana stocks to be selling for a little cheaper than they are now, I don't view valuation as short-term drawback or reason to stay away.

Another bonus... Thanks to securities lending income, MJ is yielding more than 7%. I wouldn't necessary recommend that dividend investors go piling in for this reason, but the high demand for cannabis shares right now puts funds, such as MJ, in prime position to boost their returns.

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