ETF pioneer Som Seif shuns Canadian stocks in launching new pot fund

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Canadian exchange-traded fund pioneer Som Seif has jumped across the pond with a pot ETF that’s his first European venture, but most of this country’s best-known cannabis companies aren’t making the leap with him.

Partnering with HANetf, an independent European ETF specialist, Mr. Seif’s Purpose Investments launched the Medical Cannabis and Wellness UCITS ETF this week in Germany on the Deutsche Borse’s Xetra exchange. It will also join exchanges in France, Italy, Britain and Switzerland over the next several weeks.

The fund will allow Europeans to invest in the cannabis industry through their local stock exchanges, rather than buying shares on North American counterparts. However, the fund doesn’t own many of Canada’s largest pot companies.

Industry pioneers Canopy Growth Corp., Aurora Cannabis Inc. and Aphria Inc. are absent. So are companies that more recently became some of Canada’s most valuable – Curaleaf Holdings Inc., Cronos Group Inc. and Green Thumb Industries Inc.

Nawan Butt, a money manager on Purpose’s marijuana team, said investors in Britain are not legally allowed to invest in a company whose business activities are illegal under the country’s current laws – even if the company operates legally in its home country, as the Canadians do. So to get a London Stock Exchange listing, Mr. Butt said, no recreational cannabis companies, regardless of home country, could be in the fund.

“That is the limitation of Purpose listing in that region,” Mr. Butt said. "We want to give those investors the best available index, under the circumstances, to invest in the sector.”

Some European countries have legalized medical marijuana. Marijuana Business Daily estimates that total sales of medical cannabis flower within the European Union amounted to roughly €74.4-million (about $108-million), with nearly all coming from Germany and Italy.

Purpose chose Solactive AG to maintain the index that underlies its fund, but Purpose got to draw up the methodology. Solactive is the German company that crafted the North American Marijuana Index, which is used for Canada’s biggest pot ETF, the Horizons Marijuana Life Sciences Index ETF (HMMJ).

The fund invests in publicly listed companies with significant business activities in the medical cannabis, hemp and CBD industry, as well as companies that have ancillary businesses to the sector.

It’s launching with 13 stocks. The most valuable are Scotts Miracle-Gro Co., an American fertilizer company that many consider a cannabis company because of its sales to the sector, and GW Pharmaceuticals PLC, a U.S.-listed company that sells cannabinoid medicines. Purpose estimates roughly 20 per cent of the fund is invested in the Canadian companies, compared with 80 per cent in U.S. names.

The only Canadian companies included are PharmaCielo Ltd., Namaste Technologies Inc. and Khiron Life Sciences Corp.; none is among Canada’s 20 most valuable pot stocks. (A Namaste subsidiary started selling recreational marijuana late last year, after the company was included in the index. Mr. Butt says “upon the next rebalance, Namaste will likely be removed from the index.”)

Mr. Seif said in an interview that European investors were already investing in marijuana by buying shares on North American exchanges. “The large part of the trading volume that you see in the sector does come out of Europe – from family offices, retail and institutional investors. We saw an opportunity to give them access to a product that they could participate in locally.”

Toronto-based Purpose has been a strong advocate of active management in the cannabis space, with Greg Taylor, its lead portfolio manager on the cannabis file, saying he sees long-term opportunity outside of Canada. Purpose launched its Marijuana Opportunities Fund in February, 2018, on the NEO Exchange.

Purpose competitor Horizons ETFs Management (Canada) Inc. also had plans to launch an European pot fund – and with a similar partnership with HANetf.

Horizons began to put the wheels in motion to enter the European region late last summer, said Horizon chief executive Steve Hawkins. But after the federal government changed the tax rules for synthetic exchange-traded funds, Horizons halted its European plans as the company had to reorganize about half of its ETF assets into a new corporate-class ETF structure.

“Entering the European market has been a consideration of ours for some time as we have seen quite a lot of interest in HMMJ coming from investors in Europe,” Mr. Hawkins said. “And it’s a region we continue to keep our eye on for potential expansion.”