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Part of cannabis and investing

Tilray Inc. – one of the most volatile marijuana stocks whose shares nearly doubled in a matter of hours earlier this week – has been added to the largest cannabis exchange-traded fund in Canada.

On Friday, the Toronto-listed Horizons Marijuana Life Sciences Index ETF (HMMJ) expanded its holdings to include Tilray, as well as Aleafia Health Inc. and Namaste Technologies Inc., according to Horizons ETFs Management (Canada) Inc.

With more than a $1-billion in assets under management, HMMJ aims to tracks the North American Marijuana Index - which consists of 62 stocks. On Sept. 12, the index provider, Solactive, announced Tilray would be one of several new companies included in the rebalancing of the index on Sept. 21.

Tilray, which is listed on the Nasdaq exchange (TLRY), went public in mid-July at US$17 a share. On Wednesday, Tilray shares soared, closing at US$214.06 after hitting US$300 before 3 p.m. that day. The volatility caused the stock to be halted several times in afternoon trading. The stock price has since dropped to US$135.13 as of midday Friday, falling 23 per cent.

“We are an index-tracking ETF, and our investment objective is to replicate the North American Marijuana Index so we have to do our best efforts to replicate that index with no qualitative analysis,“ Mark Noble, senior vice-president of ETF strategy at Horizons ETFs Management Inc., said in an interview with The Globe and Mail.

“The only discretion is managing how we get into positions, particularly positions that could end up being somewhat large in the portfolio, like a Tilray. Valuations don’t matter. Our investment objective is to follow the methodology of the index as best we can.”

Tilray, which currently has a market cap of US$12.5-billion, holds a 3.68 per cent weighting in HMMJ. Aurora Cannabis Inc., Canopy Growth Corp. and Aphria Inc. continue to hold significant weightings with 15.71 per cent, 12.51 per cent and 10.12 per cent, respectively.

Other Canadian marijuana ETFs are steering clear of Tilray.

The actively managed Purpose Marijuana Opportunities fund (MJJ) participated in Tilray’s initial public offering at US$17, but then trimmed its position in the first week of trading when Tilray shares were trading at more than US$30, before fully exiting a few weeks ago at US$85.

“The price action of this stock is dangerous for many investors and the sector,” said Greg Taylor, portfolio manager at Purpose Investments, in an internal note to investors on Wednesday.

“We are happy to step to the sidelines on Tilray, and look for companies in the sector that will participate in the rapid growth in this sector but at much more reasonable valuation levels. We have taken profits in several names and our overall cash level is now at 30 per cent of the fund. We have no position in Tilray, but are looking at puts as a way to participate in the coming day of reckoning for this stock.” Buying a put option gives an investor the right to sell a stock at a certain price by a certain time.