10 Cannabis ETFs Ranked For 2022

Cannabis is one of the economy’s fastest growing sectors. Here are your options for investing in marijuana in the coming year.

Most will agree that cannabis is one of the fastest growing industries, both in the United States and globally. That doesn’t mean it hasn’t been a stomach churning ride for investors. Marijuana stocks are routinely more than twice as volatile as the S&P 500 and total return swings of more than 80% have been experienced on multiple occasions.

During the one-month period from August 2018 to September 2018, the ETFMG Alternative Harvest ETF (MJ) gained more than 70%. By Christmas of that year, it had given all those gains back and then some. It gained more than 50% during one point in the 1st quarter of 2019 only to fall by more than 70% over the following year. As it stands today, MJ is still more than 70% below its all-time high.

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The cannabis industry is still figuring out what it is and where it’s going. Legalization and decriminalization continues to be one of the biggest drivers of future growth optimism, but I still believe that M&A potential could be just as impactful. After the Tilray (TLRY) / Aphria (APHA) merger announcement at the end of 2020, it looked like it could spark a wave of mergers that begin to consolidate the sector and narrow it down to a smaller group of bigger, more profitable players. We’ve seen a number of smaller acquisitions occurring throughout the year, but nothing that rivaled the size and scope of this one. I think this is still coming in the future and could be a catalyst at some point.

Investors still seem very interested in cannabis investing despite a rough year in 2021 (the majority of marijuana ETFs are down more than 20% year-to-date). The segment has taken in more than $2 billion in assets this year, an impressive number considering that the grand total of all assets across all cannabis products is about $2.5 billion. Once returns in this sector begin turning positive again (they’ve been steadily declining since February of this year), I’d expect to see the money start pouring again and help support higher prices in the major cannabis names, including Aurora Cannabis (ACB), Cronos (CRON) and Canopy Growth (CGC).

Excluding leveraged ETFs and ETNs, such as the brand new ETFMG 2x Daily Inverse Alternative Harvest ETF (MJIN), the cannabis ETF space has grown to a total of 10 different funds.

Ranking The Cannabis ETFs

The variety of ETF choices makes distinguishing the best from the rest a little challenging. You’ve probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it’s probably the most important factor, in my view), but there are a lot of things that could go into making the right choice.

That’s where I’m going to try to make things easier for you. Using a methodology that I’ve developed, which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.

Now, this certainly won’t be a perfect ranking. The data, of course, will be objective, but judging what’s more important is very subjective. I’m simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.

Methodology And Factors For Ranking ETFs

Before we dive in, let’s establish a few ground rules.

First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify and categorize those ETFs used here. There are many that qualify and we’ll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let’s run down the factors I used in the ranking methodology.

• Expense Ratio – This is perhaps the most important factor since it’s the one thing investors can control. If you choose a fund that charges 0.1% annually over a fund that charges 1%, you’re automatically coming out ahead by 0.9% annually. You can’t control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
• Spreads – This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it’s easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
• Diversification – Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund’s total assets go to just two stocks – ExxonMobil and Chevron. By buying XLE, you’re putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
• FactSet ETF Scores – FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I’m not going to copy and paste that work that they’re doing, but there is some influence there to make sure my rankings are on the right path.

There are a few other minor factors thrown into the mix, but these are the main factors considered.

One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn’t be penalized for low returns simply because the index they’re tracking is out of favor at the moment.

I’m ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?

Being in the bottom half of the list doesn’t automatically make a fund “bad”. It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.

Top Cannabis ETF Rankings For 2022

The cannabis ETF industry can be whittled down to a couple of tiers – the original marijuana ETF that still remains one of the biggest, a second ETF that has broken out from the pack and the rest, which have experienced varied degrees of success.

© Provided by ETF Focus on The Street Top Cannabis ETFs For 2022

The ETFMG Alternative Harvest ETF (MJ) was the first cannabis ETF to hit the scene and it was, at least early on, very successful. Assets ballooned and initial performance was solid. Whereas it was originally the only game in town, it’s since given way to some newer entrants, who have managed to improve on cost and structure.

The AdvisorShares Pure U.S. Cannabis ETF (MSOS) was the 7th cannabis ETF to launch, but it has broken through to become the largest ETF in the space and capture the #1 spot in these rankings. Why has it become popular as many of its peers have stagnated? I think it’s because it was the first to focus on only U.S. cannabis companies. For better or worse, home bias is a real thing and many turn away from international stocks, particularly over the past decade, in favor of what they know at home. The international exposure in these ETFs mostly comes from Canada and the United Kingdom to a lesser degree. From a strategic standpoint, marijuana industry growth rates in the United States are expected to exceed those globally, so there’s also an argument to be made that the potential within a fund, such as MSOS, is greater as well. ETFMG followed up with the ETFMG U.S. Alternative Harvest ETF (MJUS), which follows a similar strategy, but it’s barely made it on to the radar. Its #7 spot reflects its low asset base and higher trading costs.

The Amplify Seymour Cannabis ETF (CNBS) is managed by CNBC personality Tim Seymour and lands at #2 on this list. While not necessarily recognized as a factor in these rankings, CNBS has the advantage of focusing on companies with more direct exposure to the cannabis space, meaning it focuses less on things, such as tobacco and fertilizer. It’s also actively-managed, an important factor in such a rapidly evolving space.

The Global X Cannabis ETF (POTX) and the Cambria Cannabis ETF (TOKE) were a little later to the party, but these two are easily the lowest cost options in this space, coming in at 0.51% and 0.42%, respectively. Granted, given the huge volatility and boom/bust cycles we’ve seen in marijuana stocks already, 20 basis points of cost savings is probably negligible, but the companies are also leaders in the thematic space and come with high quality management teams.

One interesting newer name in this group is the Defiance Next Gen Altered Experience ETF (PSY). It’s easy to look at the name of the fund and assume that investors are getting involved in magic mushrooms and LSD, but it actually focuses more on psychiatric pharmaceuticals and mental health. The management team focuses on companies that produce products that could offer “non-addictive, short term intervention with minimal side effects” and “could dramatically improve mental health”. Pyschedelics and cannabis products could certainly be part of that solution.

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