As more and more states either allow medical marijuana to be sold or outright legalize the drug, investors interests in the business of marijuana have grown. Countless outfits have popped up on the public markets, mainly on the OTC or over the counter exchange, touting the idea that they will be the next big marijuana conglomerate which will dominate sales of the drug throughout the US.
This 'possible' market opportunity for marijuana based companies in the US could be rather large, if all 52 states opened their doors to the drug by making it legal. (Just thinking about this idea makes dollar signs pop into my head.) But as of now, the business is still small, with only a few states completely legalizing the drug and just a few others allowing it to be used for medical reasons.
The combination of a 'possibly' massive business opportunity and the current small opportunity which exists means a large number of the companies whom are trying to make it, will eventually fail. Additionally, it means that at this point there is really no market leader in the industry which investors can get behind and back financial, with any reasonable amount of confidence.
Since most investors would agree (and honestly you are delirious if your don't) that the majority of the marijuana stocks being traded on the open markets today will eventually fail, ultimately costing investors thousands or even millions of dollars, the idea that a marijuana ETF will be created has gained a lot of traction among marijuana investors for a few years now.
But, unfortunately I don’t believe the markets will see marijuana ETF's in 2015. I will go even further and say that I don’t believe the markets will see marijuana ETF's in 2016. I will go way out on the limb and say that I don’t think the markets will EVER see a marijuana based ETF and I will explain why.
First, the business of marijuana, while it has the potential, is not yet large enough for an ETF. The stocks that the marijuana ETF would have to buy are nearly all penny stocks. This increase in buy-side demand would push the share prices ridiculously high in a very short time frame, which would make it very difficult for those companies to produce returns that would warrant their new valuations.
Next, as I mentioned above, a very large portion of these marijuana business's are going to fail. That massive number of failures would hurt the overall ETF's performance. Bad performing ETF's don’t last very long because they don’t make money for the companies who operate them.
Lastly, the overall demand for a marijuana ETF would be rather low. I know what marijuana stock investors are thinking, "that I am nuts", but here is why I say this. Some of the best performing, markets crushing stocks of all-time are tobacco stocks.
Just for some perspective; $1 invested in the average American industry in 1900 would have grown to over $38,000 by 2010, not bad. But $1 invested in food related business would have turned into over $700,000 by 2010. That same $1 invested in tobacco stocks in 1900 was worth $6.3 million in 2010. Massive returns for investors.
By here is why I mention this, guess the number of tobacco ETF's?
Zero
How about sinful stock ETF's, you know the ones that own a combination of tobacco stocks, casinos, alcohol companies?
Zero (There is an ETF which owns casino operators and other gambling related companies called Market Vectors Gaming (NYSE:BJK))
That’s right; zero ETF's which focus on the best industry which someone could have invested in during the past 100 years. Furthermore, the sinful stock companies, and it's hard to deny that marijuana stocks don’t fall under that umbrella, also doesn’t even have its own ETF.
So again based on the information we have about marijuana stocks, which is very little, and the financial industries lack of interest in opening ETF's which operate in 'sinful' business's, I find it very difficult to believe that a company will soon be offering a marijuana ETF.
Matt Thalman
INO.com Contributor - ETFs
Disclosure: This contributor held positions in Apple and Microsoft at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
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