With the recent regulatory scandals in the cannabis sector, the sector underperformed the broader equity market in August.
Performance of cannabis ETFs in August
The increase in trade tensions between the US and China and the fear of a recession led the broader equity market to fall last month. The S&P 500 Index fell 1.8%, while the Dow Jones Industrial Average declined 1.7%.
On July 23, Curaleaf (CURLF) had received a warning letter from the FDA about the selling of “misbranded drugs.” On August 9, Health Canada had notified CannTrust Holdings (CTST)(TRST) that its manufacturing facility in Vaughan, Ontario, was not in compliance with several regulations. Earlier, the company had violated Health Canada’s regulations by growing cannabis plants in rooms that were not licensed. These allegations appear to have subdued investors’ sentiments, pressuring the cannabis stocks.
MJ is the first US ETF and also the largest ETF to focus on the cannabis industry, while HMMJ was designed to provide exposure to North American cannabis companies. Founded on July 25, TOKE invests in top cannabis companies such as Aurora Cannabis, Aphria, and Canopy Growth.
This year, the cannabis sector has underperformed the broader equity market. Year-to-date, MJ and HMMJ have fallen 3.7% and 1.5%, respectively. In comparison, the S&P 500 Index has risen 16.7%.
CannTrust Holdings (CTST) (TRST) and Tilray (TLRY) have lost 63.9% and 63.6%, respectively, of their YTD stock value through August 30. Investors who invested in these stocks earlier this year have lost value on these stocks. So, you can diversify your risks by considering ETFs.
Cannabis sector outlook
Just 11 states have legalized adult-use cannabis, and 33 states have approved the usage of marijuana for medical purposes. So, there is considerable scope for the cannabis sector to expand. In December 2018, the United States legalized hemp at the federal level. As a result, many cannabis companies have focused on expanding their hemp operations in the US.
Currently, Canada has only legalized the sale of cannabis in dried flowers, oils, or gel capsules. However, with the growth in the adult-use market, these companies are developing innovative products such as vapes, edibles, and infused beverages.
Although these products are currently prohibited, many industry observers expect these products to be legalized later this year. In June, Deloitte estimated the annual sales of edibles and alternative cannabis products to reach 2.7 billion Canadian dollars.
However, growing recession fears can negatively impact the cannabis sector. You can read the impact of a recession on the cannabis sector in Is the Cannabis Industry Recession-Proof?