The unquestioned market leader throughout the first two months of 2021 has got to be cannabis. On the back of continued investor interest in growth stocks, huge growth industry potential over the next 5-10 years and rebound in the demand for cannabis and CBD products, all of the stars are finally aligning for a huge rally in marijuana stocks.
The recent Aphria-Tilray merger indicates that we could be entering a broader period of industry consolidation, a development which could be another growth catalyst moving forward.
Marijuana stocks have responded in a big way so far this year. All of the sectors biggest names - Tilray, Aphria, Cronos, Canopy Growth and Aurora Cannabis - have produced 100%+ gains in just the year's first 6-7 weeks. The biggest gains have come from Tilray, which is up mo than 500%, and Aphria, which has gained more than 300%.
Valuations on pot stocks have certainly become extended, but investors have mostly paid little attention to how expensive a stock is. A post-COVID global economic rebound and another stimulus package likely to be passed by the end of March have investors in a bullish mood and kept buyers pouring in.
Investors who use ETFs for cannabis exposure in their portfolios haven't been disappointed. Throughout the big 7 marijuana ETFs, gains in 2021 have been huge, including a handful that have gained more than 100%.
As I noted in an article I wrote late in 2020, these cannabis ETFs are not all alike. They all target the sector in very different ways. Some look globally, while others target just U.S. companies. Some focus on companies with only heavy exposure to the marijuana space, while others are willing to accept companies that have anything to do with the industry. This sector is a classic case of "know what you're buying" as these funds aren't interchangeable despite most having "cannabis" in their names.
Since it's the top performers that get most of the attention, let's review the four ETFs that have already gained at least 100% in 2021.
ETFMG Alternative Harvest ETF (MJ)
MJ is the first and largest ETF in the marijuana space and still tends to earn default status of anyone looking to drop a few dollars to invest. It's one of those ETFs that casts a wide net in building its portfolio by investing in anything from cannabis growers to fertilizer producers. While it hasn't affected performance in 2021, I view this as an overall negative because sector ETFs should have as much direct exposure to the sector as possible. A fertilizer company doesn't really meet that criteria.
Still, its 2021 performance has been top notch. On top of the portfolio itself, the fund has become heavily targeted by those seeking to get a hold of shares for short selling purposes. MJ's securities lending business has the fund generating a yield of around 5-6%, income that goes straight into the pockets of shareholders.
The Cannabis ETF (THCX)
The fund with the most generic name of the group, THCX is the year's 2nd best performer so far. The fund's strategy is most similar to that of MJ, which invests in companies beyond just the core cannabis industry.
In the long run, that's probably a drawback for the fund. I generally prefer ETFs that focus on the industry's core competencies. THCX also represents one of the smaller ETFs in the space, despite tripling in size already this year. At $165 million in assets, the fund should be large enough to avoid most unnecessarily high trading fees.
Global X Cannabis ETF (POTX)
POTX joins the list of relatively unconstrained ETFs that top the year-to-date performance chart. At nearly 180%, the Global X ETF is easily this year's big winner.
POTX is a little more unique in that it's one of the more concentrated funds in the space. It typically holds fewer than 20 names, which can add to the potential volatility of an already volatile sector. On the flip side, POTX is also one of the cheapest marijuana ETFs available. With an expense ratio of 0.50%, it comes in roughly a quarter point cheaper than some of its larger competitors.
Amplify Seymour Cannabis ETF (CNBS)
Overseen by CNBC contributor Tim Seymour, CNBS has delivered a stellar year so far. The fund is actively managed, a distinct advantage in a rapidly evolving sector, and targets companies engaged in pharmaceuticals, cultivation, hemp, agriculture and consumption devices.
Like POTX, it's fairly concentrated, which can add some risk to an investment, and has roughly half of the portfolio's assets dedicated to just five names.