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The demand for cannabis stocks is increasing. Not only are individual stocks from industry giants such as Canopy Growth and Aphria in demand, the business of funds that map manufacturers and producers of cannabis is more popular than ever, as the Financial Times reports. Numerous legislative relaxations and drafts could benefit the industry – and thus also drive the ETF market.
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European Court of Justice ruled: CBD is not an addictive substance
In November 2020, for example, the European Court of Justice ruled that cannabidiol should not be classified as a drug. The drug, which is mainly marketed in its short form CBD and which is now also added to some foods in addition to liquids for e-cigarettes, is an extract from the cannabis plant, which is said to have medicinal effects. “The provisions on the free movement of goods within the Union (Art. 34 and 36 TFEU) are […] applicable, because the CBD at issue in the main proceedings cannot be regarded as an “addictive substance”, “writes the supreme judicial organ of the European Union Marketing of narcotic drugs cannot rely on the application of the freedoms of movement, since such marketing is prohibited in all Member States, with the exception of strictly monitored trade for use for medical and scientific purposes. “A French court previously had two entrepreneurs free – and fined for selling CBD liquids for e-cigarettes in France that were imported from the Czech Republic.
Draft law could benefit the cannabis industry
Just a month later, the US Narcotics Commission removed medical cannabis from a dangerous drug list after the World Health Organization recommended a reassessment, the Financial Times said. In March, New York State announced that it would allow marijuana not only for medical use but also for recreational use. Adult New Yorkers are said to be allowed to own up to 85 grams of cannabis, as ZEIT reports.
With the US Secure and Fair Enforcement Banking Act passed in April, cannabis companies in the USA can now hope for further support. The bill is supposed to make it easier for banks to financially support legal cannabis companies in the US. If the law comes into force, the industry could be significantly expanded. The question is not whether easing will be implemented, but when, believes Dylan Kennett of the London law firm DLA Piper. “Ultimately, the real question is whether nationwide legalization will take place in the US under this government,” the Financial Times quotes the company’s senior partner.
Problems with cannabis ETFs: Too much capital in too few companies
The consequences of the loosening of the law seem to be evident in the capital market: Senior fund analyst Kenneth Lamont from Morningstar recognizes an increasing demand for funds that track cannabis companies. “People basically use these products to rely on the government’s regulatory decisions,” the newspaper quoted the experts as saying. A problematic development could, however, lead to the fact that more and more money is being invested in ETFs, but that too few companies are involved in the capital. “The liquidity that the ETF structure promises means investments can be pulled out on a whim,” said Lamont. “Should any of these ETFs suffer a large outflow, it could have difficulty finding buyers for large holdings in small businesses.” To counteract this concentration, the HANetf Medical Cannabis and Wellness ETF, for example, recently increased the number of companies it contains from 19 to 34. The fund has only been trading since January 2020, and at the start it only contained 16 stocks, as the Financial Times writes.
Country-specific deviations complicate the legal situation
The Rize Medical Cannabis and Life Sciences Ucits ETF has also been available for trading since February 2020. In addition to the London Stock Exchange, the Rize ETF cannabis fund can also be purchased in XETRA trading and on the Swiss SIX. “It was not the easiest product to construct,” explains Rahul Bhushan, one of the company’s four co-founders, to the Financial Times. For example, some countries are only allowed to invest in cannabis companies if their business is legal in their home country. In Great Britain, however, the legislation differs, as the newspaper reports. For example, foreign cannabis manufacturers must be allowed to do business in the UK so that UK investors can invest in them. Four years before the cannabis ETF was launched by Rize, Bhushan and his team were already working on the preparation of the fund. The co-founder had already shown himself to be convinced of the potential returns in the industry that could be achieved by opening up the company to investors.
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Expert advises against getting started – first
Nevertheless, the risks associated with ETF trading should not be underestimated. For example, HANetf removed all shares in Namaste Technologies after it became known that the e-commerce provider for cannabis companies has invested 49 percent in a company that makes cannabis bars and beverage mixes. Since these business practices are against the law in some countries, trading the ETF would have been illegal there too.
Due to the regulatory and liquidity risks, Lamont does not currently recommend private investors to invest in cannabis ETFs – even if these are certainly the target group for the investment products. “The potential market is clearly huge globally,” he sums up. “From the point of view of private investors, however, it must be emphasized that this is a risky investment.”
Finanzen.net editorial team
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