Think Twice Before You Invest in This Pot ETF
“When I was in England, I experimented with marijuana a time or two and didn’t like it. I didn’t inhale, and I didn’t try it again.”
– Bill Clinton, 1992
Then-presidential candidate Bill Clinton’s answer to the question about whether he ever smoked pot became a running joke in the 1990s.
By the time Barack Obama was asked the same question just 14 years later in 2006, he shrugged his shoulders and said, “When I was a kid, I inhaled. That was the point.”
America’s attitude toward pot has changed over the decades.
At the height of the counterculture movement in 1969, only 12% of Americans approved of legalizing pot, according to a Gallup poll.
By 2016, that number had jumped to 60%.
Fast-forward to 2018, and little old ladies in Pasadena can now buy an exchange-traded fund (ETF) that invests in pot-related businesses.
On December 26, the ETFMG Alternative Harvest ETF (NYSE: MJX) became the first marijuana-focused ETF to list on the New York Stock Exchange.
The launch was a roaring success.
After starting with only $5 million, the ETF attracted more than $350 million in just over a month.
If you’ve followed the stock recommendations of my colleagues, you made some big money in marijuana stocks in 2018.
Still, buying pot stocks – especially in the U.S. – is riskier than, say, investing in a fast-growing tech company.
After all, it’s unlikely that the U.S. Department of Justice will declare Silicon Valley’s latest darlings “illegal” overnight.
Drug Dealing for Fun and Profit
Pot is a big business.
Arcview market research expects the North American cannabis market to grow from $6.7 billion in 2016 to $22.6 billion by 2021.
That equals an eye-popping compounded annual growth rate of 27% – a rate matched only by the growth of broadband since 2000.
(Grand View Research predicts the global medical marijuana market will reach $55.8 billion by 2025.)
As Arcview points out, you’d be hard-pressed to find any other $5 billion consumer market that can generate a 25% compound annual growth rate over the coming five years.
And there’s another side to the pot business equation.
The legalization of pot has been a boon for cash-strapped state government coffers.
Pot sales have generated the state of Colorado more than $500 million in tax revenues since the state legalized pot in January 2014.
And California’s decision to legalize marijuana for recreational use in 2017 may generate up to $1 billion in annual excise tax revenues.
The Global Pot Legalization Revolution
The global trend is clear.
Portugal legalized all drugs in 2000. Up north, Canada plans to legalize marijuana nationally by July 2018 (though conservative politicians may delay that date).
In the U.S., more than half of the states plus the District of Columbia allow medical use of marijuana.
As California has a population of 40 million, its legalization decision was a watershed event.
If the U.S. fails to legalize marijuana, it will be bucking a growing global trend.
The Shaky Basis for Investing in Pot
With all the bullishness surrounding pot stocks, don’t forget one thing…
Recreational pot use is still illegal under federal law.
The U.S. Drug Enforcement Agency classifies marijuana as a Schedule I controlled substance alongside heroin and LSD.
Yes, recreational pot use is legal in eight states and the District of Columbia.
But that also means casual pot use is illegal in 42 states.
A little more than a month ago, U.S. Attorney General Jeff Sessions sparked a sell-off in marijuana stocks when he announced that he was retracting the “Cole Memo.”
Issued by the Obama administration, the memo allowed states to legalize cannabis without fear of federal prosecutors going after state-licensed sellers.
Like it or not, whether the U.S. marijuana industry lives or dies is at the discretion of the federal government… And Trump’s Justice Department has the U.S. marijuana industry in its crosshairs.
Is the Pot ETF Headed for a Fall?
The sponsors of the ETFMG Alternative Harvest ETF used some shady tactics to get the first U.S. pot ETF off the ground.
ETFMG knew that the Securities and Exchange Commission had failed to approve previous filings for marijuana ETFs.
So ETFMG cleverly retrofitted an existing ETF that had previously tracked a Latin American real estate index with a new pot index.
In doing so, ETFMG circumvented the need to get SEC approval for a pot ETF while sparing itself the Herculean task of finding a custodian.
Without a custodian, an ETF can’t get off the ground.
Buttoned-up Wall Street institutions like BNY Mellon and U.S. Bank have long refused the reputational and legal risk of acting as custodian for a cannabis fund.
These banks realize they could quickly run afoul of federal banking laws, which could even cost them their banking licenses.
Even after the pot ETF retrofit, ETFMG’s custodian – U.S. Bank – could yank support for the ETF at a moment’s notice.
And there are signs that U.S. Bank may do just that… and soon…
The bottom line?
Any such move would devastate pot stocks… and likely spell the end of the first pot ETF.
Stay away from the ETFMG Alternative Harvest ETF. Instead, look for ETFs in other sectors or asset classes. You can find the ones I’ve recommended by clicking here.
*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.
About Nicholas Vardy
A widely recognized expert on the exploding asset class of exchange-traded funds (ETFs), Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street Journal, Financial Times, Newsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and master’s degree from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking ETF content is published regularly in the free daily e-letter Liberty Through Wealth.