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A change in U.S. federal law has cleared the way for one of the biggest cannabis companies to join the pre-eminent pot-stock exchange-traded fund.

TSX-listed Horizons Marijuana Life Sciences Index ETF has added Charlotte’s Web Holdings Inc., a Colorado-based, Canadian Securities Exchange-listed hemp company with a market capitalization of more than $2-billion. Charlotte’s Web produces and sells hemp-based, cannabidiol (CBD) wellness products in the United States. CBD is a non-intoxicating cannabinoid increasingly associated with health benefits.

Since HMMJ is listed on the Toronto Stock Exchange, it follows the TSX’s rules banning Canadian-listed companies with U.S. businesses that violate that country’s federal laws against cannabis. As a result, the ETF can’t include several cannabis concerns with valuations topping $1-billion- Curaleaf Holdings Inc. and Green Thumb Industries Inc. are examples.

However, in December, as part of the 2018 Agriculture Improvement Act, the U.S. federal government removed hemp-derived CBD from the Controlled Substances Act. This means that CBD extracted from low-THC hemp is no longer an illegal substance at the federal level. CBD extracted from high-THC cannabis remains a scheduled substance.

The change has been a boon for companies such as Charlotte’s Web, which make CBD products from hemp. Because they are no longer violating a federal law, they can access banking and financial services, and eventually list on a larger stock exchange.

Charlotte’s Web spokesman Cory Pala says that with the passage of the U.S. farm bill, senior North American listings have become more accessible for the company and it is reviewing its options. That could mean leaving the Canadian Securities Exchange. “Senior listings in Canada and the United States are of great interest to the company,” he said.

Charlotte’s Web now takes up 1.4 per cent of HMMJ, making it the ETF’s 14th-largest holding. “It’s a big one, a fairly substantial size,” says Mark Noble, the senior vice-president for ETF strategy for Horizons. “We’ve seen significant growth in that stock [this year], because people recognize there’s going to be a direct revenue stream for that business.”

HMMJ is the biggest and oldest fund for cannabis stocks, but it’s not actively managed, with investment professionals making value judgments about which pot stocks are top picks. Instead, it’s based on the North American Marijuana Index run by German index company Solactive.

By following the TSX’s policies on U.S. operations, and adopting some of its own, HMMJ has diverged from the Solactive index. There are two dozen cannabis companies in the index, in its latest reconstitution announced earlier this month, that are not owned by HMMJ.

And since Horizons doesn’t immediately sell off stocks dropped by Solactive, there are 13 companies owned by the ETF that are no longer in the index. Mr. Noble notes that in the highly volatile sector, companies can drop out one quarter and come back the next, and the small “float,” or investable amount of shares, means that Horizons can’t exit a position in many of the small cannabis companies quickly and efficiently.

For this quarter, HMMJ also added 48North Cannabis Corp. (NRTH); Agraflora Organics International Inc. (AGRA); Cannara Biotech Inc. (LOVE); Flowr Corp. (FLWR); Heritage Cannabis Holdings Corp. (CANN); ICC International Cannabis Corp. (WRLD.U); Pharmacielo Ltd. (PCLO); Westleaf Inc. (WL); and Zenabis Global Ltd. (ZENA).

With files from Clare O’Hara

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