Earlier this month the company behind the HMMJ ETF, Horizons Exchange Traded Funds, announced that they had officially filed the final prospectus necessary to launch the Horizons US Marijuana Index ETF (NEO:HMUS).
Units of the new fund—which is the world's first US-focused cannabis index ETF—began trading on April 18, after launching with over $2 million in assets. This number shot up to $10 million after a single hour of trading, making it one of the most successful launches in the history of the NEO exchange.
Similarly to the HMMJ—which deals exclusively in Canadian pot stocks—the HMUS is designed to provide investors with wide exposure to a diversified basket of cannabis shares, and will make use of a passive management structure. According to the CEO of Horizons, Steve Hawkins, the fund already has holdings in 32 different cannabis stocks, including Curaleaf, Cresco, MedMen, Charlotte's Web, and iAnthus.
"HMUS will be the first index ETF solution to focus solely on identifying, and investing directly in, U.S. marijuana and hemp companies," Hawkins said.
"While marijuana remains federally illegal for medical and recreational usage in the United States, the number of legal cultivators and distributors at the U.S. state level continues to grow. Many of these companies have chosen Canadian stock exchanges to list their stocks in order to raise capital to meet growing investor demand."
"30 [of our securities] are listed on the CSE; two are listed on the NEO Stock Exchange. An ETF is really a portfolio of diversified investments into the underlying strategy itself. So, it's anybody who's really significantly exposed to the marijuana or hemp industry in the US. We will own this basket of diversified securities."
Yes We Cannabis
An official statement released by Horizons has said that the HMUS will seek to replicate the performance of its' Underlying Index—the US Marijuana Companies Index—and is primarily focused on publicly-listed North American life science companies that have significant exposure to the US marijuana or hemp industry.
The Underlying Index will be market-capitalization-weighted, and is subject to a cap for constituent issuers of a maximum of 10% of the net asset value of the index at the time of rebalance.
Like the HMMJ, there are minimum size and liquidity thresholds for cannabis stocks that wish to become eligible for inclusion in the index, such as possessing a market capitalisation greater than $75 million.
"The Horizons Marijuana Life Sciences Index ETF (HMMJ) was the first Marijuana ETF listed in the world. We launched that ETF shortly before cannabis was fully legalized in Canada," CEO Steve Hawkins said.
"We see a lot of similarities with the regulatory environment in the U.S. to what we saw in Canada, three years ago. If the U.S. were to enact any type of federal legalization, either medical or recreational, that would immediately make the U.S. the largest federally approved cannabis market in the world."
"HMUS will give investors direct diversified access to this early stage sector which has the potential of future U.S. regulatory change."
Horizons have also confirmed that the HMUS will be targeting pot stocks based on the "market cap of the class of shares", although in some cases—such as with Harvest, Truleaf, and GTI—they will be limited to only taking into account the outstanding shares of the listed class, thanks to the respective companies voting structures.
Although Horizons have yet to list what the HMUS ETF's expense ratio will be—since the fund only recently launched—the HMMJ is known for having an unusually high ratio of 0.94 percent, despite the fund holding roughly three-quarters of its' net assets in just ten stocks.
"As the U.S. continues to further liberalize its marijuana regulations, we anticipate that more investors will be looking to invest in companies with significant business operations in the U.S. market and HMUS will provide a diversified and liquid way to gain that exposure in one ETF."
– Steve Hawkins
A significant portion of the HMUS ETF's holdings are concentrated across a limited number of securities—similar to the HMMJ—with over 60 percent of the fund's assets being held in just seven stocks.
The composition of the Underlying Index will be rebalanced on a market capitalisation basis every quarter, and will be capped so that no individual stock can exceed more than 10 percent of the weight of the index when rebalanced.
Buy the Ounce
Considering the strong demand for Horizons previous two ETFs—the Horizons Marijuana Life Sciences Index ETF and the Horizons Emerging Marijuana Growers Index—it seems likely that the HMUS will enjoy similar success. According to an official statement from Horizons, the total assets of all three funds under their management are valued at approximately $1 billion.
The new fund is also expected to carry a relatively high management fee—in this case 0.85 percent—which is almost triple the amount of a normal ETF.
The HMUS ETF is currently trading at $10.18, and as of 24 April it has already amassed over $17 million in net assets.