Short Sellers and Easing Rules Boost Pot ETF Higher
The cannabis-related ETFMG Alternative
Harvest ETF MJ has been outperforming this year so far,
surging about 46%. The surge was driven by easing of rules and
regulations on the highly guarded drug for recreational and medical
usage (read: ETFs That Topped & Flopped in Q1).
In fact, its popularity has been rising since Canada legalized
recreational cannabis last year and become the second country in
the world to do so on a national level. Additionally, a number of
states in United States have also joined the race of marijuana
legalization. The White House, Congress and U.S. regulators have
also softened their stance on the drug’s legalization. All these
developments have injected strong optimism into the emerging
marijuana industry, spurring deal activities and pushing marijuana
stocks higher.
The tremendous success of the pot industry is showing no signs of
slowdown with short-sellers piling up heavy losses. That said,
short-selling of the stocks also led to the spike in the MJ
ETF.
Inside The Short-Selling Mechanism
Short selling or securities lending is another revenue stream for
ETF issuers through which they can make additional money.
Securities lending is a practice where mutual funds and ETFs pay
agents to lend out underlying components in the funds to other
traders and thereby earn interest. ETF providers typically lend out
securities to investors who want to short a stock. Investors borrow
shares from the provider and sell them on the market, hoping that
they will be able to repurchase the same at a lower price in the
market, thereby gaining from the spread.
Per Bloomberg, while many ETFs engage in securities lending, it’s
been a particularly lucrative practice for pot funds as many
cannabis stocks have a small public float and aren’t readily
available to borrow. The funds charge a fee to borrow the shares,
generating additional income that can help boost their performance.
Pot securities cost about 15% to borrow versus typical rates closer
to 1% for more prosaic shares. But borrowing fees can rise to as
high as 110% for popular short targets like Tilray Inc TLRY (read:
Tilray Earnings Impressive: More Reasons to Buy Marijuana
ETFs).
Marijuana ETF can lend out 33% of their holdings, according to
Bloomberg Intelligence. Income from short sellers added 0.58
percentage point to MJ’s overall performance in the first three
months of the year, according to Sam Masucci, chief executive of
ETF Managers Group, which runs the fund.
Some of the most shorted cannabis stocks include Tilray, Canopy
Growth CGC, Cronos Group CRON, Aphria APHA and Aurora Cannabis ACB
(read: Marijuana ETF Outperforms in Q1: 6 Stocks Leading the
Rally).
Let’s take a closer look at the fundamentals of MJ.
MJ in Focus
This is the first and only ETF focusing on the cannabis/marijuana
industry. It tracks the Prime Alternative Harvest Index, designed
to measure the performance of companies within the cannabis
ecosystem, benefiting from global medicinal and recreational
cannabis legalization initiatives. The fund holds 37 securities in
its basket with higher concentration on the top firms. Canadian
firms make up 62% of the portfolio, while American firms comprise
24.2%. The ETF has AUM of $1.2 billion and trades in a solid volume
of around 928,000 shares. It charges 75 basis points in annual fees
(read: Marijuana ETF Joins Billion Dollar Club).
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Aphria Inc. (APHA) : Free
Stock Analysis Report
Cronos Group Inc. (CRON) :
Free Stock Analysis Report
Aurora Cannabis Inc. (ACB)
: Free Stock Analysis Report
Canopy Growth Corporation
(CGC) : Free Stock Analysis Report
Tilray, Inc. (TLRY) : Free
Stock Analysis Report
ETFMG Alternative Harvest
ETF (MJ): ETF Research Reports
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