Evolve launches a marijuana ETF, and Horizons adds its second

Canadian stocks dominate in both portfolios, with some Australian exposure.

Rudy Luukko 12 February, 2018 | 10:00PM

The number of Canadian-listed exchange-traded funds specializing in the marijuana industry is doubling to four this week, with two contrasting strategies being rolled out by competing firms.

Evolve Marijuana (Symbol: SEED), which has a global mandate but starts out investing almost exclusively in Canada, opened for trading today on the Toronto Stock Exchange. It will be managed internally by Toronto-based Evolve Funds Group Inc., whose chief investment officer Kirk Cooper specializes in quantitative investing.

In selecting a portfolio of 25 stocks, Cooper employs quantitative techniques such as ranking stocks according to their short-term price momentum. This is combined with fundamental analysis, as well as risk constraints including ensuring that stocks have sufficient trading liquidity. Up to 10% of the portfolio can be invested in equity securities of unlisted issuers.

The ETF's opening-day geographic mix is 94% Canadian. All of these companies are engaged in medical marijuana, rather than the yet-to-be-legalized recreational marijuana industry. The remaining 6% of the portfolio's geographic weighting is in Australia which, like Canada, has currently legalized medical marijuana.

As laws change and the marijuana industry continues to develop in Canada and elsewhere, the ETF will expand its holdings outside Canada. "The next wave of growth could be driven by the globalization of the industry," Raj Lala, president & CEO of Evolve ETFs, said in a release. "Active management in SEED allows us to capitalize on these opportunities."

In response to a January memorandum to U.S. district attorneys from U.S. Attorney General Jeff Sessions, which rescinded previous guidance concerning prosecution of cannabis-related offences under U.S. federal law, the Evolve ETF's portfolio excludes U.S. stocks. Nor, for the time being, will it invest in any non-U.S. stocks that are engaged in marijuana-related businesses in the U.S.

Though marijuana is legal in some U.S. states, it's illegal under federal law, resulting in uncertainty over whether marijuana growers and distributors will face prosecution. The Canadian Securities Administrators has imposed additional risk-disclosure requirements on Canadian issuers, including ETFs, that have exposure to the U.S. marijuana industry.

This week's second launch of a marijuana ETF, to open for trading on Feb. 14, is Horizons Emerging Marijuana Growers Index. It will be listed on the NEO Exchange and trade under the symbol HMJR.

Sponsored by Horizons ETFs Management (Canada) Inc., the ETF will invest in small-capitalization companies that are primarily involved in the cultivation, production and/or distribution of marijuana.

Although the ETF's benchmark Emerging Marijuana Growers Index maintained by Solactive is designed to consist primarily of publicly listed Canadian and U.S. companies, the only North American constituents will be Canadian companies. The index has no U.S. constituents since there are currently no U.S. companies that meet the index criteria, Horizons senior vice-president Mark Noble told Morningstar.

However, Noble added, the index does include some Canadian-listed companies that have significant U.S. exposure. The Solactive index and the Horizons ETF have the flexibility to include U.S. issues of any company that gets listed on a public U.S. stock exchange and meets the other index criteria.

As of Jan. 29, the index's geographic weightings consisted of 79% Canada and 21% Australia. The Australian weighting slightly exceeds the index's cap of 20% of issuers domiciled in developed markets outside North America, but this cap applies only at the time of rebalancing.

To be included in the index, stocks must generally have market capitalizations greater than $50 million (in Canadian dollars) but less than $500 million for initial inclusion. The maximum market cap is $750 million. Weightings are based on market capitalization, subject to an 8% cap on the weighting of any one holding. The index is rebalanced quarterly.

The management fee for the new Evolve ETF is 0.75%. In addition, a flat administration fee of 0.25% covers most expenses. The Horizons ETF's management fee is 0.85%, not including expenses.

This week's new launches join Marijuana Opportunities (MJJ), launched on Feb. 1, and Horizons Marijuana Life Sciences Index (HMMJ), which was launched in April 2017 and became the first ETF in this volatile equity-market niche.

About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.