When it comes to assets under management, the ETFMG Alternative Harvest ETF (NYSEArca: MJ) is a success. Previously, MJ was structured as a Latin America real estate exchange traded fund, but became the first US-listed marijuana ETF in December.
In less than four months as a marijuana ETF, MJ has attracted $404.4 million in assets under management, confirming that there is appetite for this concept. Additionally, some weed ETFs trading in Canada have found success. Those factors would seem to encourage the debuts of rivals to MJ in the U.S., but that has yet to happen. There are some factors holding back more weed ETFs from coming to market.
“The assets of an ETF in the U.S. have to be custodied in a U.S. bank,” according to Green Market Report. “It can’t be offshore or in Canada. The custodial bank actually holds the securities of the ETF. This is why the main cannabis ETF’s are in Canada with the Horizons company.”
In January, it was reported that U.S. Bancorp, MJ’s custodian bank, is reviewing its relationship with the fund.
“At least three other issuers that contemplated starting pot ETFs ran into trouble lining up custodians, people familiar with the matters said. ETFMG bypassed those start-up issues by converting an existing fund,” reports Bloomberg.
Potential investors should be aware that while 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.
“Since marijuana is still federally illegal and the Cole Memorandum was rescinded by the Justice Department, banks are extremely reluctant to do business with any cannabis company, even if it doesn’t ‘touch the plant,’” according to Green Market Report. “If Alternative Harvest can’t replace the bank and find another custodian, it would more than likely be forced to close the fund and liquidate the holdings it has already amassed.”
Liquidity is another concern facing aspiring marijuana ETFs. In the U.S., many weed stocks are not listed on major exchanges, such as Nasdaq or the New York Stock Exchange.
“Most of the cannabis stocks in the U.S. are traded in the OTC Marketplace. There are a handful of biotech stocks traded on the NASDAQ Exchange (NDAQ) that have a cannabis component,” reports Green Market. “The New York Stock Exchange (NYA) is also hesitant to list cannabis stocks, but a few have managed to squeeze their way in the door. However, the majority of pure cannabis stocks are at the OTC.”
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