It’s been a week since the full legalization of marijuana in Canada, but cannabis stocks and exchange-traded funds (ETFs) alike are taking a hit as volatility in the major U.S. indexes continue to roil the markets.
The Horizons Marijuana Life Sciences Index, which trades on the Toronto Stock Exchange, was down 1.51% as of 12:00 p.m. ET, while the U.S. exchange-traded ETFMG Alternative Harvest ETF (NYSEArca: MJ) was down slightly at 0.24%. Stocks like Tilray (TLRY) and Canopy Growth Corporation (CGC) took losses to the tune of 4.18% and 2.44%, respectively.
TLRY saw a frenzy of investor interest last month, which skyrocketed its shares to over $250 before selling off to its current level of $115. MJ, the first U.S.-listed ETF to target the cannabis and marijuana industry, is up 23.58% year-to-date and 30.35% within the past year, according to Yahoo! Finance performance numbers.
In the past five days, however, as sell-offs in the Dow continue to fuel volatility, MJ has been hit harder after initially muting the effects of October’s major sell-off near the beginning of the month.
MJ seeks to provide investment results correspond generally to the total return performance of the Prime Alternative Harvest Index, which is concentrated in the pharmaceuticals and tobacco industries. The serendipitous growth of these cannabis stocks may force large pharmaceutical companies to partner with these companies to effectively hedge against the marijuana medicine industry invading their market share, according to Tilray CEO Brendan Kennedy.
In September, cannabis stocks surged after receiving a bevy of positive news, including investment firm Morgan Stanley saying that GW Pharmaceuticals’ new cannabinoid-based therapy will be a “blockbuster.” Additionally, reports surfaced that beverage giant Coca-Cola was looking to enter the marijuana industry space with purported interest in Canadian company Aurora Cannabis Inc to help stymie slowing soda sales.
Cannabis stocks haven’t been able to carry that same tune into October in what has been a volatile month for the sector and stocks in general. Investors were expecting that full legalization of marijuana in Canada would bring additional gains, but it appears the effects of the broad markets are now affecting the industry.
While long-term investors are getting punched in the gut, the latest slide has been a godsend to short sellers in cannabis stocks
“If the cost to borrow cannabis stocks begins to cheapen in the larger-cap names, we may see more short sellers enter this over-heated sector looking for stock prices to ease back down to more reasonable value-based multiples,” Ihor Dusaniwsky, head of research at S3, wrote in a note.
Nonetheless, those looking to buy and hold can sleep easier knowing that some market analysts are still high on expectations.
“While it was difficult for provinces and experts to predict just what the demand for cannabis would be once legalized, the actual demand far exceeds any reasonable expectations,” said Quebec-based Hexo Corp. in a statement.
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