The ETFMG Alternative Harvest ETF (NYSEArca: MJ) is struggling this year. California, a state that was seen as a potential help to MJ and marijuana equities, is playing a part in the exchange traded fund’s woes.
California was one of the first states to legalize marijuana for medicinal use. The largest U.S. state followed that up on Election Day 2016 by finally voting to legalize marijuana for recreational use. Some industry observers believe California will be a major driver of the U.S. marijuana industry in the years ahead.
Remember that MJ converted into a marijuana ETF, the only such fund trading in the U.S., in late 2017, just days before it became legal for recreational marijuana retail stores to open in California. Yet the fund is down more than 18% year-to-date.
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.
Related: Leveraged Marijuana ETFs Could Debut in Canada
Problems Galore for Recreational Weed
Recent data points suggest California’s high taxes on legal recreational weed and burdensome regulations are hindering the state’s legal marijuana business.
“Many people are still buying weed on the illicit market, thanks in part to steep markups and high taxes in legal pot shops, along with local restrictions, according to survey data released Wednesday from marijuana delivery service Eaze,” reports Investor’s Business Daily.
Eaze data indicate that about 20% of California weed buyers are acquiring that weed via illegal means, either from dealers or unlicensed retailers. That means the state cannot collect tax revenue on those sales. Obviously, there is no benefit to legitimate marijuana investments, single stocks or ETFs, when marijuana sales are illegal.
“Digging into consumers’ complaints with the legal marijuana business overall in the six months prior to surveying, 47% cited excessively high taxes, the most frequent issue. Thirty-six percent cited a lack of electronic payment options, while 32% cited “overpriced” products,” according to IBD.
A mere 5% tax reduction on legitimate weed sales in California could propel scores of new buyers into the market, Eaze data indicate.
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