Pot Stocks & ETFs: Risks And Rewards

Pot stocks are soaring again. Shares of GW Pharmaceuticals (GWPH) surged yesterday after the company announced that the DEA had approved sale of a new cannabis derived drug for treatment of pediatric epilepsy.

Earlier Tilray (TLRY) got DEA’s approval to import a cannabinoid study drug into the US. The stock, which IPOed on the Nasdaq in July at $17, is up about 730% since then. It is the first cannabis company to go public on a major US exchange.

The emerging pot industry is growing fast and gaining legitimacy. Per research firm Euromonitor, the American market for legal marijuana products will reach $20 billion by 2020, up from $5.4 billion in 2015.

Many beverage giants are investing or planning to invest in cannabis. Coca-Cola (KO) is reported to be in talks with Canada’s Aurora Cannabis (ACBFF) to develop cannabidiol infused beverages. Cannabidiol is a non-psychoactive substance in marijuana that is known to have some health benefits.

Recently Constellation Brands (STZ), invested $4 billion in Canopy Growth (CGC), raising its stake to 38%.

Recreational marijuana will become legal in Canada soon. However, it remains illegal at the federal level in the US while 30 states and the District of Columbia have legalized the use of the drug for medicinal or recreational use.

Investors should also remember that marijuana stocks are extremely volatile.  These are younger and riskier companies in an industry that continues to evolve.

The ETFMG Alternative Harvest ETF (MJ)--the first and only pure play US listed ETF targeting the cannabis industry--holds 37 companies that are involved in legal cultivation, production, marketing or distribution of cannabis or related products.

The ETF recently changed its custodian and other service providers. It was trading above its NAV—the value of its underlying assets--for some time, which could be the sign that something is wrong. It could mean that the creation/redemption process for ETF shares was not working properly.

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