Investing in cannabis: the pros and cons of carrying marijuana in our portfolio

Investing in cannabis is not a new trend. In fact, the first ETF in the sector in the United States emerged in 2017. However, in recent months the trend has gained popularity in the heat of the legalization of the plant, both for medicinal and recreational use. Canada and the United States are proof of this. The last American state to take the step was New Mexico. The southwestern region of the country has joined a list already made up of nearly 20 states, including New Jersey, Arizona, Virginia, Mississippi, Montana, South Dakota and New York.

Precisely, only in New York, the new legislation determines a 9% tax on cannabis sales, to which an additional 4% should be added to be distributed between municipal and county authorities. In total, the authorities expect to collect 350 million dollars a year in taxes alone. Therefore, it is not surprising that many analysts affirm that the unblocking of a law, which has been in the corridors of the different Assemblies for years, has been unraveled as a result of the fiscal hole caused by the Covid-19 pandemic.

“It is clear that it is a fashionable sector in recent years, the advance in its legalization has given rise to new legal businesses related to the sector that have quickly acquired a large volume”, says Antonio Jiménez Colilla, financial advisor of Mapfre, present on the . An example of this is the company Canopy Growth, which today reaches 30,000 million dollars.

But beyond a fad, and its recreational use, its medicinal benefits are scientifically proven. The National Academy of Science, Engineering and Medicine of the United States, after conducting a review of more than 10,000 investigations, classifies the benefits of cannabis in different categories: conclusive, moderate and limited or null evidence. The most conclusive results affirm that marijuana is effective for the treatment of chronic pain, the reduction of nausea after chemotherapy and the reduction of symptoms of multiple sclerosis. But, in addition, different studies show its usefulness against other diseases, such as Parkinson’s, Alzheimer’s, certain neurological disorders and even epilepsy.

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But what about its economic benefits? Estimates predict that in the United States alone it could move up to 30,000 million in 2025. The MG Alternative Harvest ETF (NYSE:MJ), the first cannabis ETF to be listed on a US Stock Exchange, in December 2017, rises nearly 80% since the lows of March and in 2021 it already amounts to 34.93%. The truth is that “investments in these assets have endured extreme volatility throughout their stock market life, which means that only very aggressive profiles can consider investing in this sector,” says Jiménez Colilla.

For this profile, Mapfre’s financial adviser considers that through a well-diversified vehicle it could be appropriate to invest between 5% and 10% of the portfolio. Above all, given the current situation in which we find ourselves, where the fixed income and variable income markets have very tight valuations, many of them trading at historical highs. “These assets could offer us a decorrelated alternative where we can get the returns of the stock market without following the same path,” he says.

Along these same lines, Javier Molina, from eToro, trusts the opportunities of a sector that, “although it has doubled its value since the low of 2020, compared to the average it is not expensive, nor is it close to the maximum.” In fact, the MG Alternative Harvest ETF is trading 50% below its 2018 highs, when it hit $40. In any case, Molina recommends investing in this trend through ETFs. “It is very difficult to make a selection of specific actions because there have been many variations of companies and, furthermore, they are not all the same. You have to take into account if they have plant production, where they have them, if they have the capacity to carry out a first treatment or not…”

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The best are ETFs like the MJ or the Amplify Seymour Cannabis (NYSE: CNBS), which more recently (2019) invests at least 80% of its portfolio in cannabis-related companies.

Associated risks

But not all experts finish seeing its appeal. Among them, the financial adviser of Andbank, also present on the Finect platform, Francisco Martínez. “I dare not classify something that raises so many doubts as an investment opportunity. The first has to do with the regulation of its use. While therapeutic use is increasingly widespread, recreational use is allowed in few countries. In many others there is a certain legal vacuum and this poses a regulatory risk that must always be present in investment decisions,” he says.

On the other hand, Martínez recalls that the WHO considers this substance to be a drug, and the moral risks that derive from it collide head-on with compatible investments under ethical and responsible criteria, which are increasingly present in the industry.

Another of its problems, according to Jiménez Colilla, is the valuation of its assets “because when a new activity never carried out until now begins, it is difficult in the first instance to be able to assess whether a company is expensive or cheap, in addition to not having references in the sector that can give us a clue as to how the real market will take this type of product”. Hence, like Molina, Mapfre’s advisor recommends investing through an ETF or investment fund that allows diversification among listed companies in this sector.

To the above, the Mapfre advisor recalls the inconvenience of the volatility in which the sector moves due to uncertainty, “which gives rise to sudden changes in valuations due to new regulations and leaves many investors out.” “The regulatory issue in certain countries where politics changes hands very quickly, makes it even more difficult to specify how the opening of new cannabis markets will be or if they will continue to remain stable with their policies where they are currently legal,” he specifies.

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Lastly, Jiménez Colilla mentions the reputational problem of being considered “a drug” for certain users, which can make certain companies reluctant to enter the sale or distribution of products related to the plant for fear of losing brand image. while consumers change their concept.

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