Toronto-headquartered Horizons ETFs has launched the world’s first thematic ETF targeting companies involved in the development of therapeutic solutions using psychedelics.
Steve Hawkins, President and CEO of Horizons ETFs.
The Horizons Psychedelic Stock Index ETF (PSYK CN) has listed on Canada’s NEO Exchange and comes with a management fee of 0.85%.
A body of clinical research has demonstrated the potential use of psychedelic compounds, such as psilocybin and ketamine, as a treatment for a range of medical conditions including mental illness, depression, addiction, and post-traumatic stress disorder (PTSD), amongst many others.
This research has helped to break down regulatory barriers and resulted in a growing number of firms entering the psychedelics industry, providing the portfolio breadth necessary for an ETF.
Steve Hawkins, President and CEO of Horizons ETFs, commented: “After decades of restrictions, recent policy changes and exemptions in Canada and the United States have allowed for increased research in the therapeutic application of psychedelic compounds, and the potential to create an entirely new marketplace for drugs derived from psychedelics.
“PSYK will give investors exposure to the leading public companies undertaking this important research and development of treatments for the more than 700 million people globally that, according to the World Health Organization, suffer from some sort of mental illness, addiction or eating disorder.”
Index methodology
The fund gains its exposure to the psychedelics theme by tracking the North American Psychedelics Index, a proprietary index owned and operated by Horizons ETFs, and independently calculated by Frankfurt-based Solactive.
Eligible securities must be listed in the US or Canada and have a minimum float-adjusted market capitalization of C$25 million and an average daily traded value (ADTV) above C$125,000.
The methodology focuses on producers and suppliers of psychedelic medicines, as well as biotechnology companies engaged in the research and development of psychedelic medicines. In a bid to capture the entire value proposition of the psychedelics-as-medicine theme, however, the index will also include firms that are part of the supply chain for, or are distributors of, psychedelics.
An oversight committee, run by Horizons ETFs, monitors the index, ensuring that it continues to deliver diversified exposure to the psychedelics industry by adapting the underlying methodology as the industry evolves.
Index constituents are weighted by float-adjusted market capitalization subject to a cap of 10% on any single issuer.
In order to sharpen the thematic exposure, the weight of any pharmaceutical company with a total market capitalization of $5bn or greater, whose production, development, or research of psychedelic pharmaceuticals represents less than 25% of total revenue, will be capped at 5%. In aggregate, all such pharmaceutical companies will also be capped at 20%.
The index is reconstituted and rebalanced on a quarterly basis. During rebalancing, index weights may be adjusted to prevent excessive trading in securities relative to their three-month average daily traded value (ADTV) – this process aims to limit the price impact of rebalancing on thinly traded securities.
As of 24 January, the index consisted of 17 names. While many of the firms are small but growing life sciences companies, the index also includes a few global multinationals that have developed in-market applications. For example, Johnson & Johnson, the world’s largest health company, recently received FDA approval for Spravato, a ketamine-based nasal spray for the treatment of depression.
Ahead of the curve
Horizons ETFs is no stranger to launching disruptive (and somewhat controversial) investment products. In 2017, the firm introduced the world’s first cannabis-focused ETF, the Horizons Marijuana Life Sciences Index ETF (HMMJ CN). HMMJ comes with a management expense ratio of 0.86% and presently houses nearly C$600m in assets under management.
Hawkins added: “We see many similarities between that [cannabis] industry in 2017 when it was in its infancy to the psychedelics industry now. We see the potential for significant growth from this new sector like what we have witnessed with the cannabis industry during the last few years.
“At Horizons ETFs we strive to be at the forefront of key global transformative investment themes. We believe the opportunities with psychedelics not only provide a compelling investment case but also the potential to provide life-changing impact for those suffering from mental illness.”