Purpose launching European cannabis ETF

North American cannabis companies are set to get support from European investors as Purpose Investments opens up the market with a German-listed ETF

Ruth Saldanha 20 January, 2020 | 1:48AM
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Ruth Saldanha: Earlier this week, Purpose Investments launched a European cannabis ETF. The new ETF called the Medical Cannabis & Wellness UCITS ETF will list on the German Xetra exchange and will invest in global medical cannabis and CBD wellness sectors. The timing of this launch is interesting as cannabis was one of the worst-performing sectors of 2019, more than halving in value from the start of the year. To discuss the ETF and its timing, Nawan Butt, Portfolio Manager at Purpose Investments is here today.

Nawan, thank you so much for being here today.

Nawan Butt: Thank you for having me.

Saldanha: To begin with, why did you launch this ETF now?

Butt: So, I think it's a two-pronged answer to that. One, it's primarily what we have to talk about is how the European investor has been underserved for their cannabis investment needs for a very long time now, and we've been trying to address this question for a while to see how we can proliferate cannabis investment to that European investor. It's not so much so about timing the valuation in the sector. What we're trying to do is give them the right tools that they require for the sort of exposure that they require. And that is also a reason why it's a passive ETF and not an active one. As far as valuations are concerned, we've had a very tough year in 2019. But I think 2019 year was tough because the promise got well ahead of what reality actually was in the industry. So, we think valuations were at a very reasonable level late into last year and it's actually a really great time to launch, a great time for new investors to come into the space and have that cannabis exposure without paying multiples on what the actual value proposition here really is.

Saldanha: So, do the European investors actually get access to the North American market? What is the kind of geographic profile of the underlying holdings?

Butt: So, we are aiming to go global with this and give European investors really an access to a global medical marijuana and CBD wellness. Now, most of the industry that's already developed so far in the world has been in North America. As you know, Canada has been a hub for cannabis investments for at least three to five years now. This is the main source of financing where everybody comes from Canada. Canada is where everybody is listed. It doesn't matter what sort of geographic exposure you have. So, it's a very good base to start off with.

Saldanha: We believe here at Morningstar that the growth will more come from the recreational rather than the medical side. So, why did you decide to go the medical route rather than the recreational one?

Butt: The rate of legality for medical marijuana is going to be much faster than the rate for recreational marijuana. And this has been proven if we take a look at how many countries out there are currently on medical paths. In addition to that, if we take a look at companies with medical exposure just in Canada alone, the average selling price that they're getting, the profits that they're making, the consumers that they have are much stickier as well. So, there's a much more robust element of the medical business than there is of the recreational business. This is before we even get started on the pharmaceutical side of things. Something like GW Pharma, which has figured out how to control seizures and childhood epilepsy is now a multi-billion-dollar firm. And this is just the start of cannabis research. It's been outlawed for 70-plus years to do any research and that's where science has really taken off. And I think it's going to be very, very exciting to see what we – the growth that we see on the medical and the pharmaceutical side.

Saldanha: So, finally, I'd like to talk about the product itself. What kind of investors should consider this? What kind of risk appetite should they have? And how much of their portfolio should they put into such a niche ETF?

Butt: It's definitely a very risky product itself. And that is based on the regulatory hurdles that the industry faces right now. There's a lot of challenges, a lot of challenges around medical marijuana, a lot of challenges around recreational and even more challenges around making the pharmaceutical aspect of this viable in the long term. So, definitely, a very hungry industry, a highly volatile industry as well. And I would recommend that any investors taking a look at this space, only assign a very small portion of their growth portfolio into this space.

Saldanha: So, about 5%?

Butt: I'd say a little bit less. You'd probably be taking a closer look at it at 1% to 2%.

Saldanha: Thank you so much for joining us today, Nawan.

Butt: Thank you for having me.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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