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The road to federal decriminalization of cannabis products in the U.S. is uncertain.Robert Layman /The Associated Press

Long a disappointment, cannabis stocks are again gaining interest among investors after a renewed push for legalization from the U.S. House of Representatives.

Unlike the quick path to federal legalization in Canada, the road to federal decriminalization of cannabis products in the U.S. is uncertain given there is less support in the Senate for the House-approved MORE (Marijuana Opportunity Reinvestment and Expungement) Act.

Investor enthusiasm around the MORE Act triggered a brief rally in cannabis in late March. Experts believe investors may be better off with an ETF that can offer a wide exposure to what remains one of the most speculative of sectors.

The publicly traded cannabis space is a confusing mix of compromises and cross border reach arounds for companies operating in distinctly different consumer, equity and regulatory environments based on geography.

That means investors need to do their homework, says Andrew Semple, a research analyst with Echelon Partners in Toronto who covers many Canadian and U.S. cannabis companies.

“The average investor needs to be cautious,” he says. “We see good potential in a growth industry, but investors need to have an understanding of the regulatory environments, of the growth plans of their businesses and their ability to access capital in a capital-constrained sector.”

The Canadian cannabis ETF space is dominated by Horizons ETFs Management (Canada), with four main offerings.

The Toronto-based fund provider introduced the first marijuana ETF in 2017, the Horizons Marijuana Life Sciences Index ETF (HMMJ-T), which has an 0.86 per cent management expense ratio (MER) and total assets of $244-million. The fund is down 13 per cent so far this year. (All data from Morningstar as of Apr. 6 close).

HMMJ takes a passively managed approach to provide exposure to the performance of the North American marijuana index. Its top holdings include Tilray Brands Inc., Jazz Pharmaceuticals PLC, Innovative Industrial Properties and Canopy Growth Corp., with a roughly two-thirds U.S. to Canada asset mix.

The legal Canadian market has puffed up about as much as it can, creating a fragmented market with a handful of well-capitalized companies “that are really living on a hope and a prayer that legalization occurs in the United States” says Mark Noble, executive vice-president of ETF strategy with Horizons.

The U.S., meanwhile, has strong state operators who trade at a relative discount to Canadian operators and do not share the same access to capital markets.

If federal legalization occurs, those Canadian companies have the financial means to quickly snap up U.S. companies and, in fact, some already have tentative agreements in place to buy providers.

“It is really their only path to long-term profitability,” he says. “Otherwise, what you will end up seeing is about half the sector over the next three or four years either go bankrupt or get acquired. Selling marijuana in Canada is not a very profitable venture,” he says, evidenced by the profusion of legal pot shops across the country.

Horizons also offers another long-term “buy and hold” ETF, the Horizons US Marijuana ETF (HMUS-NE), with an MER of 1 per cent and $19.1-million in assets. It has lost 18 per cent so far this year

Horizons also offers two tactical funds, the BetaPro Marijuana Companies Inverse ETF (HMJI-T), with an MER of 1.99 per cent and $14.2-million in assets that has returned 6 per cent year to date. There’s also the BetaPro Marijuana Companies 2x Daily Bull ETF (HMJU-T) that uses leverage to try and double the daily return of the marijuana index. It charges 2.05 per cent, has $4.9-million in assets and has lost 37 per cent year to date.

Horizons has chosen the index strategy to cannabis investing, arguing it’s too difficult to pick winners and losers in the emerging industry.

The other homegrown fund, the Purpose Marijuana Opportunities ETF (MJJ-NE), takes a different approach: It’s Canada’s first actively managed cannabis fund that invests in cultivation, extraction, retail and financing in the global cannabis industry. MJJ charges 1.48 per cent with assets of $10.2-million, with roughly three-quarters of its holdings in U.S. companies. It has lost 17 per cent so far this year.

In the U.S., there are currently nine cannabis ETFs.

One that stands out is the AdvisorShares Pure US Cannabis ETF (MSOS-A) which charges 0.73 per cent and has US$996.2-million in assets. It has dropped 23 per cent so far this year.

MSOS was the first U.S. ETF to invest in U.S. multi-state operators using swaps rather than investing directly in Canadian cannabis companies like other funds before it, notes Neena Mishra, director of ETF research with Zacks Investment Research in Chicago.

She recommends using an actively managed ETF because it’s an evolving space “and probably an active manager would do better than an index-tracking ETF.”

Besides MSOS, Ms. Mishra suggests investors also consider the AdvisorShares Pure Cannabis ETF (YOLO-A), which charges 0.76 per cent and has US$141.3-million in assets and the Amplify Seymour Cannabis ETF (CNBS-A), which charges 0.75 per cent and has US$70.2-million in assets. YOLO is down 22 per cent so far this year while CNBS has fallen 15 per cent.

“Investors have a lot of choices; they can take a look at what the ETF aims to do,” she says. “But there is no consistency in performance, so it is very difficult to recommend one particular ETF may be able to do better than another going forward.”