The Big Marijuana Stock Buy 2 Fund Giants Just Made

Marijuana stocks are making investors rich, and 2019 has been extremely kind to many of the cannabis companies with which investors in the space are most familiar. Huge returns have helped most marijuana stocks bounce back from losses in 2018, and right now, it looks like the sky's the limit for the industry.

Things have now started getting to the point at which mainstream institutional investors are looking more seriously at cannabis companies. In addition to stock analyst companies doing evaluations of marijuana stocks, major financial institutions are taking stakes in top cannabis players. In particular, the two biggest names in the money management business just reported substantial stakes in one marijuana stock, and all indications suggest that the future could be even brighter for the company.

A new favorite for fund companies?

The two companies are Vanguard and BlackRock, and both took an interest in the same marijuana stock: real estate investment trust Innovative Industrial Properties (NYSE: IIPR). Earlier this month, BlackRock filed its quarterly Schedule 13G with the U.S. Securities and Exchange commission, reporting its stake in the cannabis real estate specialist as of Dec. 31. BlackRock said that it owned more than 540,000 shares of Innovative Industrial, with its stake amounting to 5.5% of that class of shares. Although the filing was made on Feb. 8, the statement was signed as of Jan. 2 -- further showing that the company had taken its position in Innovative Industrial before the beginning of 2019.

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Shortly thereafter on Feb. 11, Vanguard followed suit. The index fund giant reported an even larger position of almost 950,000 shares of Innovative Industrial as of Dec. 31. That represented more than 9.7% of the REIT's outstanding shares, and again, the nature of the filing indicated that Vanguard held its position during 2018.

Why BlackRock and Vanguard will become even bigger Innovative Industrial shareholders

Since Dec. 31, a lot has happened to Innovative Industrial. Its share price has soared, and the company has gotten new financing to help it potentially buy even more properties in the future. Even with a rising share price, the REIT's dividend is still healthy, representing a yield of 2.1%.

But the most important piece of news from Vanguard and BlackRock's position was the decision from S&P Dow Jones Indices to add Innovative Industrial to the S&P SmallCap 600 index. That move happened as of Feb. 21, and as a result, anyone seeking to track the S&P SmallCap 600 had to purchase Innovative Industrial shares to match the return of the index accurately.

As it happens, both BlackRock and Vanguard have funds that use that index as a benchmark. The Vanguard S&P Small-Cap 600 ETF has almost $1.1 billion under management, while its smaller small-cap growth ETF has about $440 million in assets. That's a relatively small amount of index exposure, and Innovative Industrial's small market capitalization makes it only a tiny portion of each fund's overall assets.

BlackRock has an even bigger exposure to the index, with its iShares Core S&P Small-Cap ETF holding a whopping $45.3 billion in assets. A look at that fund's holdings alone as of Feb. 22 indicates that it owned almost 574,000 shares of Innovative Industrial worth almost $42 million, more than doubling its stake as of less than two months ago. A similar iShares fund tracking small-cap growth stocks has $5.8 billion in assets under management, but that fund includes another 146,000 shares of the REIT worth another $10.7 million.