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Some of Aphria's medical marijuana plants grow in their greenhouse in Leamington, Ont., on May 26, 2014.

GEOFF ROBINS/The Globe and Mail

As the Canadian cannabis sector heats up, so is a battle between passive and active exchange-traded funds who each claim to have the better strategy for investors looking to make money in the sizzling sector.

The Redwood Marijuana Opportunities Fund, the world's first actively managed marijuana ETF, began trading Thursday in Toronto under the ticker MJJ, losing 2 per cent to $19.54 at 10:23 a.m. The strategy allows for active buying, selling and shorting of pot stocks with a focus on growth and relative valuation, said Greg Taylor, who manages the fund for Redwood Asset Management.

"There's a lot of volatility and there's a lot of people that are just buying the mania and not doing their research," Mr. Taylor said in a phone interview. "I think active strategies can be more reactive, can move around, can be more dynamically managed to take advantage of some of the big flows."

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The Redwood ETF will seek out Toronto-listed companies with low costs, high value-added businesses or international exposure, and will avoid firms with operations in the U.S. due to legal uncertainty. Although it's currently expensive and difficult to short pot stocks, the Redwood ETF will have a "few opportunistic shorts," Taylor said. It will also hold a cash position that can be deployed in the event of a pullback.

Taylor said he's particularly interested in stocks that aren't held by the big passive cannabis ETFs -- the Horizons Marijuana Life Sciences Index ETF and ETFMG Alternative Harvest ETF. Toronto-based Horizons has also filed to launch a Junior Marijuana Growers Index ETF, which will focus on smaller players.

"This is a sector that has been really dominated by passive retail money coming in," Mr. Taylor said. "There are lot of good companies that haven't made the ETFs."

MJJ's top 10 holdings at launch will include Village Farms International Inc., WeedMD Inc. and Invictus MD Strategies Corp., as well as bigger companies like Canopy Growth Corp. and Aurora Cannabis Inc.

But the co-chief executive officer of Toronto-based Horizons ETFs Management Canada Inc. said he expects actively managed cannabis funds to "shoot themselves in the foot."

"You make one wrong decision with respect to your allocation and you're going to feel the wrath of your investors at the end of the day," Steve Hawkins said in an interview at Bloomberg's Toronto office.

"Let's not kid ourselves here: this is a high-risk, high-reward space," added Mark Noble, Horizons' senior vice-president of sales strategy. "Your primary way to get protection is through diversification."

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