Here’s the Truth About Popular Cannabis ETFs

Exchange-traded funds (ETFs) have never been more popular. They boast around $5 trillion in assets as of late 2018, and depending on the day, they account for anywhere from 25% to 40% of all daily volume in U.S. markets.

These baskets of assets, containing everything from stocks and indexes to commodities, bonds, and currencies, allow investors easy "one-stop shop" exposure to vast swathes of the global market.

If you can think of it and you can buy or sell it on a market, there's probably an exchange-traded product for it.

So, naturally, we're starting to see marijuana sector ETFs - one of which, in particular, is trading at prices that seem attractive at first glance.

Let's take a look at the cannabis fund I've got my eye on. I'll tell you exactly what's going on with it and the best move to make to maximize your marijuana profit potential...

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How ETFs Work with the Market

The fund in question is the recently launched AdvisorShares Pure Cannabis ETF (NYSEArca: YOLO).

YOLO shares are trading for around $25 each right now. One of its key holdings, Innovative Industrial Properties Inc. (NYSE: IIPR) - a unique cannabis sector real estate investment trust (REIT) and the only cannabis dividend-payer - sells for $86 at the moment.

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The ETF seems cheaper than the REIT, which would be attractive to a lot of retail investors.

But... before you decide to go with the ETF, there's something you've got to know.

See, there are two kinds of ETFs: passive and active.

With a passive ETF, new stocks are added to a portfolio, usually according to a fixed formula. The advantage of owning this kind of ETF is that the fees are very low - less to manage.

Now, a passive ETF is fine if it owns stock of companies in a mature sector, like railroads or food manufacturers.

But for the cannabis industry, a passive, static ETF doesn't make sense.

This "breed" of ETF doesn't adapt well to changes in the marketplace, and it can take a long time for a company to be added or removed from the portfolio.

Put another way, when you're sailing the seas of marijuana, you want to be in an agile, go-fast boat that can turn and maneuver on a dime, not a huge freighter that's going to take eternity to turn.

Company A makes a major misstep? Too bad. It might not be removed from the ETF until next quarter.

Company B made some great moves and needs to be in every investor's portfolio yesterday? Again, too bad. It won't be added until those running the ETF have their next meeting.

Like I said, there are actively managed ETFs, too, where someone with financial training selects stocks and buys, sells, and trades them as they see fit.

Of course, you're going to have to pay a management fee. The YOLO ETF I mentioned earlier has a management fee of 0.6%.

That isn't a lot, but one of the biggest disadvantages with owning an ETF is that you are stuck with all of the companies in the portfolio.

If you're particularly excited about CBD companies, or companies building a presence in California, you have to go along for the ride with everything else that is in that ETF.

In most cases, you're simply better off buying individual stocks.

This is a personal belief, but ETFs also limit your critical investing education and experience. You won't learn anything from parking your money in a fund and just looking daily, weekly, monthly, or quarterly to see if the price has moved up or down.

Here's the Bottom Line on Cannabis ETFs

Make sure you have your eyes open.

If you want exposure to the cannabis sector, understand the fees involved, and aren't particularly interested in learning about investing, an active ETF might make more sense than buying individual stocks.

But if you're interested in the opportunity to beat broad market returns and want to become a more educated investor, buying individual stocks is the way to go.

You can click right here to learn how to take advantage of all the cannabis stock research and resources, like our proprietary NICIlytics database and Cannabis Investor's Report, available through the National Institute for Cannabis Investors.

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About the Author

Greg Miller started working on Wall Street in September, 1987, just a month before the “Black Monday” stock market crash.

During his career there, he became an expert in just about every kind of publicly traded security - from blue-chip and small-cap stocks to municipals, junk bonds, and derivatives. As a portfolio manager, Greg was responsible for over $500 million of assets in mutual funds and insurance company accounts.

After leaving the Street, he designed a successful options trading strategy and made lucrative tech investments for a financial publication. He has also helped develop new products and worked with other editors to hone their strategies.  He’s always been dedicated to deep, fundamental research - and he always will be - because he believes buying the very best companies at the right price is the best way to amass wealth in the stock market.

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