Following the success of the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ), the fund's creators are looking to expand their offering with the launch of several new exchange-traded funds.
Horizons ETFs Management Canada Inc have announced that in addition to providing the HMMJ they are also "actively pursuing" the creation of a new ETF that will focus exclusively on licensed US-based producers.
Aside from being the world's first marijuana focused ETF, the HMMJ is also the largest fund on the Canadian market, and currently holds over $1 billion in assets. The fund has been performing strongly this year—offering return of over 60 percent—which makes it the strongest-performing equity ETF in Canada.
While the HMMJ has continued to grow in value, it is unable to hold any US-based assets because the Toronto Stock Exchange prohibits the listing of companies that aren't compliant with jurisdictional federal law. Thus far, the only exception to this is the Colorado-based company, Charlotte's Web Holdings, which deals exclusively in federally legalised hemp-derived products.
The lack of exposure to the US market is a problem for many investors, especially considering that research from BDS Analytics suggests that it may be worth $22 billion by 2022.
According to the CEO of Horizons, Steve Hawkins, the move was prompted by strong interest from investors who were approaching the company about its' existing fund.
"We've had a lot of investor inquiries saying, 'HMMJ is great but I want exposure to the underlying U.S. marijuana market directly,"' Hawkins said.
"There is so much speculation in this infant market that stocks can go up 20 per cent in seconds — it's extremely sensitive."
"We were very surprised by the success of the [HMMJ] ETF. We sold out our C$10m of seed capital within nine minutes of listing. It was over C$100m in the first few days."
Short Sellers See Green
Horizons also has plans to capitalise on the speculative investors who have been drawn to the cannabis industry because of the instability. Prospectuses have already been filed for the creation of two new marijuana ETFs which are designed to appeal specifically to investors wanting to trade on that volatility.
The first fund is a leveraged ETF which will use debt to double investors exposure to the market, with the aim of returning twice the daily performance of the underlying index. The second new fund will be an "inverse" ETF, which is intended to return the opposite of the index using derivatives.
The announcement comes after the company elected to abandon similar plans last year that would have seen the launch of a leveraged inverse ETF.
"We don't feel that product is right for the marketplace at this point in time. Maybe down the road when the cannabis market becomes more established and more predictable from a qualitative perspective, then we might revisit the issue."
– CEO Steve Hawkins
Horizon's upcoming leveraged and inverse ETFs are expected to be a big hit with short sellers, as the company has already generated millions of dollars in revenue by lending out its holdings to traders looking to bet against the 60 percent climb taking place this year.
Although many ETFs do engage in securities lending, it has proven particularly profitable for cannabis funds due to the high borrowing rates.
Cannabis securities typically cost approximately 15 percent to borrow—which is already higher than average—however popular short selling targets such as Tilray (NASDAQ:TLRY) can attract fees as high as 110 percent. This has led to the HMMJ outperforming almost all other non-leveraged ETFs in North America during the first quarter of 2019.
Horizons CEO Steve Hawkins confirmed that the fund was able to bring in $38 million in 2018 by lending out its stocks to short sellers, with almost $11 million of that arriving in the fourth quarter.
"We've been able to generate an over 20 percent yield on the portfolio from inception because of securities lending activity. This is a volatile investment landscape. There's a lot of people that don't believe in this sector from a long-term growth perspective and are trading on that volatility by shorting their stock," he said.
"They're coming to us because we are the largest institutional holder of a lot of these companies. There's a strong interest from traders out there who really like the space because of the volatility and will actively trade ETFs in and out of the market every single day."
"Providing a short-term trading vehicle to get leveraged or inverse access to marijuana is something that these day trading investors want access to."
Considering the success that Horizons has already seen with its HMMJ ETF, it seems likely that their three upcoming funds will generate substantial interest from investors. News of the company's plan also led to a boost for the HMMJ, and as of early April, the stock was trading at 21.72 a share.
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