When you check out the constituent makeup of the publicly traded "marijuana" ETFs (listed below) you will notice that they include a large percentage of ancillary marijuana-related pharmaceutical, real estate, grower supplies, goods and services and tobacco/spirit companies. How can that be? Shouldn't the ETFs consist of baskets of actual marijuana stocks that reflect the performance of the industry?

Exchange-traded funds (ETFs) allow investors to buy a basket of stocks with a single investment, offering diversification and reducing risks. Of the 73 ETFs traded in the U.S. markets, 8 are cannabis focused and this article looks at what these supposedly "cannabis" ETFs consist of and 5 indices that track each of the 5 marijuana categories to enable you to make informed investment decisions.

Here's what is behind their subtle misdirection. In an attempt to put together a basket of stocks in the cannabis sector that will do well and, therefore, attract investors, most ETF managers have taken major liberties with the definition of a "marijuana" company.

• Since when is a pharmaceutical company like GW Pharmaceuticals or Cara Therapeutics a marijuana company because it has products under development that have some cannabis in their formulation? 
• Since when is a REIT a marijuana company? Sure, all its properties might be leasebacks of the facilities of marijuana cultivators but companies such as Innovative Industrial Properties are, first and foremost, real estate investment trusts (REITs) with all the advantages that such security entails. 
• Since when is a fertilizer supply company (i.e. Scotts Miracle-Gro) that has a product that contains cannabis considered a marijuana company or a company that uses gardening supplies and hydroponic equipment (i.e. GrowGeneration)? 
• Since when is a tobacco, liquor, or beer company a marijuana company just because it has invested in a marijuana company?

As I see it, only one of the 8 ETFs discussed below qualifies as a true cannabis ETF. The other 7 are pretenders. Below we identify each of the ETFs and the percentage weight of the various marijuana category constituents in each and rank them according to the degree of exposure each ETF has to the pure MSO and LP categories:

1.  Global X Cannabis ETF (POTX):  Its stated objective is to invest at least 80% of its total assets in the securities of the Cannabis Index  and in American Depositary Receipts and Global Depositary Receipts based on the securities in the underlying index. To that end its components consist of:

• Pharmaceutical Companies: 15.8%
• Ancillary Goods & Services: 12.2%
• Pure Marijuana Companies: 72.0%

2. Horizons Marijuana Life Sciences Index ETF (HMMJ): Its stated objective is to provide exposure to the performance of a basket of North American publicly listed life sciences companies with significant business activities in the marijuana industry. To that end its components consist of:

• • Ancillary Goods & Services: 27.2%
  • Pharmaceutical Companies: 7.1%
  • Pure Marijuana Companies: 65.7%

3. The Cannabis ETF (THCX): Its stated objective is to invest at least 80% of its net assets, plus borrowings for investment purposes, in exchange-listed common stock or corresponding American Depositary Receipts of cannabis companies. To that end its components consist of:

• Ancillary Goods & Services: 37.3%
• Pharmaceutical Companies: 4.5%%
• Pure Marijuana Companies: 58.4%

4. AdvisorShares Pure US Cannabis ETF (MSOS): Its stated objective is to invest at least 80% of its net assets in securities of Multi-State Operator companies that derive at least 50% of their net revenue from the marijuana and hemp business in the United States and in derivatives that have economic characteristics similar to such securities. To that end its components consist of:

• Derivatives/Swaps: 41.2%
• Ancillary Goods & Services: 13.2%
• Pure Marijuana Companies: 45.6%

5. Amplify Seymour Cannabis ETF (CNBS):  Its stated objective is to invest at least 80% of its net assets in the securities of companies that derive 50% or more of their revenue from the cannabis and hemp ecosystem. To that end its components consist of:

• Ancillary Goods and Services: 41.0%
• Pharmaceutical Companies: 12.9%
• Cash on Hand: 6.1%
• Pure Marijuana Companies: 40.0%

6. ETFMG Alternative Harvest ETF (MJ): Its stated objective is to invest at least 80% of its total assets in companies that derive more than half their revenue from cannabis-related activities as well as companies that produce tobacco products, fertilizers, plant foods, pesticides and equipment for cannabis or tobacco. To that end its components consist of:

• Ancillary Goods and Services: 25.8%
• Tobacco Companies: 20.8%
• Pharmaceutical Companies: 15.3%
• Cash on Hand: 1%
• Pure Marijuana Companies: 37.1%

7. Cambria Cannabis ETF (TOKE): Its stated objective is to invest at least 80% of the value of the fund's net assets in cannabis companies. To that end its components consist of:

• Ancillary Goods and Services: 35.7%
• Tobacco/Liquor Companies: 15.9%
• Pharmaceutical Companies: 15.4%
• Cash on Hand: 1.8%
• Pure Marijuana Companies: 31.2%

8. AdvisorShares Pure Cannabis ETF (YOLO):  Its stated investment objective is to invest at least 80% of its net assets in securities of companies that derive at least 50% of their net revenue from marijuana/hemp and marijuana/hemp-related business and in derivatives or other instruments that have economic characteristics similar to such securities. To that end its components consist of:

• Ancillary Goods & Services: 35.6%
• Derivatives/Treasuries: 29.0%
• Pharmaceutical Companies: 9.3%
• Pure Marijuana Companies: 26.1%

The above information clearly shows that there is nothing "pure" about this ETF despite having the word in its name.

You can see from the above that the extent of the various categories in each of the 8 ETFs differ considerably from each other and, as such, each index presents a different picture of what is happening in the cannabis marketplace so what's an investor to do?

If you are more interested in just having a clear picture of what is happening in the cannabis sector without the misleading inclusion of non-marijuana companies masquerading as marijuana companies (marginally-related at best) then I suggest you follow the almost daily postings on TalkMarkets of the stocks in the sector divided into specific categories to accurately reflect what is actually happening within the sector.

Below is a comparison of how each of the above indices have performed YTD, and so far in April in brackets, which we think provides the clearest overview of the cannabis stock sector that is available anywhere:

1. the Canadian Pure-Play Licensed Producers Pot Stock Index (8 constituents): +36.7% YTD (-17.0% so far in April); (See index details here.)
2. the American Pure-Play Multi-State Operators Pot Stock Index (22 constituents): +28.7% YTD; (-7.6% so far in April);  (See details here)
3. the Ancillary Pot Stocks Index (16 constituents): +12.3% YTD; (-4.4% so far in April); (See details here)
4. the Conservative Tobacco/Spirits Pot-related Stocks Index (8 constituents): +6.3% YTD; (+3.0% so far in April); (See details here) and
5. the new Cannabis-Centric Bio-Pharma Companies Index (13 constituents): -1.1% YTD; (-14.1% so far in April); (See details here.)

If you want to know how well, or poorly, the marijuana stock sector is doing check out the details of the above indices (updated once or twice a week here on TalkMarkets) instead of the marijuana ETFs analyzed above and you will be the most informed individual you can possibly be.