Horizons ETFs (Canada) is enhancing its suite of marijuana-focused ETFs with the listing of futures contracts on the Horizons Marijuana Life Sciences Index ETF (HMMJ CN) and the filing of a preliminary prospectus to launch inverse and leveraged ETFs that provide exposure to Canadian marijuana companies.
The Horizons Marijuana Life Sciences Index ETF (HMMJ CN) provides exposure to North American-listed stocks that are involved with medical marijuana bioengineering and production.
Futures on units of HMMJ have begun trading on the Montreal Exchange. Contracts on HMMJ are available with quarterly expiration dates, in January, March, June and September – initially extending to a June 2019 expiry.
“We view the formal availability of futures on HMMJ as recognition by the Canadian investor marketplace that HMMJ is the key benchmark for marijuana investing in Canada,” said Steve Hawkins, president and co-CEO of Horizons ETFs. “For us, this further legitimizes marijuana-equity investing and HMMJ as the key way to get broad index exposure to this rapidly growing sector.”
HMMJ was introduced on the Toronto Stock Exchange in April 2017. It was the first ETF to offer direct exposure to North American-listed stocks that are involved with medical marijuana bioengineering and production, through tracking the North American Medical Marijuana Index.
Constituents must have a business strategy focused on the marijuana or hemp industry, and only stocks that meet minimum asset and liquidity thresholds are eligible for inclusion in the index.
The fund has a management expense ratio of 0.75% and has proven to be very popular with investors as assets under management have currently reached over CAD$850 million.
For the new ETFs, the preliminary prospectus outlines three products that provide leveraged, inverse, and inverse leveraged exposure to Canadian-listed marijuana companies as represented by the Solactive Canadian Marijuana Companies Index.
The proposed ETFs, branded under Horizons ETFs’ family of tactical BetaPro ETFs, are outlined below:
BetaPro Canadian Marijuana Companies 2x Daily Bull ETF (HMJU CN)
BetaPro Canadian Marijuana Companies -2x Daily Bear ETF (HMJD CN)
BetaPro Canadian Marijuana Companies Inverse ETF (HMJI CN)
“Given the underlying volatility of this sector, we believe there is demand from certain sophisticated Canadian investors to take on more risk using leveraged ETFs to attempt to generate potentially higher short-term returns – very much like they have done with gold mining stocks,” said Hawkins.[pullquote]”Given the underlying volatility of this sector, we believe there is demand from certain sophisticated Canadian investors to take on more risk using leveraged ETFs to attempt to generate potentially higher short-term returns.”
– Steve Hawkins, president and co-CEO of Horizons ETFs[/pullquote]
Inverse and leveraged funds can provide an efficient means for sophisticated traders to obtain tactical exposures; however, they are generally considered unsuitable for retail investors who may not fully understand the risks involved.
The funds tend to decay in value if held for an extended period of time, potentially leading to significant losses especially in volatile but range-bound markets. This characteristic generally increases with the degree of leverage involved. Gains and losses are compounded over periods of more than one trading day, and as such will deviate from the leveraged performance of the underlying asset.
The proposed funds, in particular HMJD and HMJI, may also suffer from other systemic irregularities, particularly the high cost of borrowing securities of marijuana companies to provide “short” exposure. Horizons warns that “the hedging costs incurred by a counterparty and charged to HMJI or HMJD, as applicable, and indirectly borne by unitholders, are expected to be material, and will be between 10% and 25% per annum of the aggregate notional exposure of HMJI or HMJD’s forward documents, as applicable.
“This means that the hedging costs incurred by a counterparty may be as high as between 20% and 50% per annum of the net asset value of HMJD.”
Hawkins notes, “Shorting marijuana stocks in particular is an expensive and complex process. If used appropriately, inverse marijuana ETFs could be a potentially more liquid and easier way for investors to get short exposure to Canadian-listed marijuana stocks while limiting their risk to what they invested.
“It is important to note that these ETFs certainly wouldn’t eliminate many of the risks investors face when shorting marijuana stocks, which includes being subject to the high cost of borrowing marijuana stocks.”