The ETFMG Alternative Harvest ETF (NYSEArca: MJ), the only marijuana exchange traded fund listed in the U.S., has struggled for much of this year, but the fund is showing signs of life this month and there are some reasons to believe MJ could notch some more near-term upside.
MJ’s underlying index may cover businesses that are legally engaged in activities related to cannabis, the benchmark does not include those that directly cultivate, produce or distribute marijuana or products derived from marijuana, unless such activities become legal under U.S. federal and state laws.
One catalyst could be short-covering as data suggest some bearish traders are heavily short marijuana equities, including some MJ components.
“The short position in Marijuana related equities has never been higher, in terms of dollar value, ($2.1bn) or shares short (more than 200m). The increase in shares means that in recent weeks short sellers have not only allowed the value of their positions to rise with the share prices, they are also actively increasing the position size,” according to IHS Markit data.
Risks to Shorts for the MJ ETF
MJ launched just days before California opened stores for legal sales of recreational marijuana. Recreational marijuana use was legal in the largest state throughout 2017, but the opening of retail outlets dedicated to legal weed sales was prohibited until the start of 2018.
The ETF is up more than 5% this month and is close to reclaiming its 200-day moving average, which could brighten MJ’s technical outlook.
Canada-based Canopy Growth Corp. (NYSE: CGC), one of the largest Canadian marijuana stocks, started trading on the New York Stock Exchange last week. Canopy is MJ’s fourth-largest holding. There are now two pure-play Canadian marijuana firms trading on major U.S. exchanges, perhaps signaling the negative stigmas surrounding these investments in the U.S. is ebbing. MJ has over 4379 million in assets under management, indicating there is some appetite for marijuana-related investments.
“The potential for broad investment in the space, including through ETFs, could have a positive impact on all the related stocks, as was the case during Q4 2017; however, short sellers have shown no reluctance to increase positions into a rising tape. With short interest and prices on the rise, something will have to give eventually, though as Tesla bulls and bears can attest, that may take some time,” according to Markit.
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