ETF is an abbreviation for exchange traded fund, and like the name implies ETFs are investment funds that trade on an exchange just like stocks. This means you can buy or sell shares of the fund at any time the market is open. It also means that you can short-sell the ETF, trade on margin and use limit and stop-loss orders. An ETF would be nothing without the underlying indices they track.
ETFs and Indices
HMMJ specifically seeks to replicate the performance of the North American Medical Marijuana Index. The North American Medical Marijuana Index is a market-cap weighted basket (with a maximum weight of any one stock set at 10%, regardless of its market cap) of North American publicly listed companies with significant operations in the medical cannabis industry. The majority of ETFs track indices that determine which stocks and their allocation to those holdings.
Below is a list of the cannabis companies to be included in the ETF:
If you wanted to replicate the exposure of HMMJ on your own, you would have to buy 16 different marijuana stocks, some of which that trade in the U.S. and some in Canada, a costly and labor intensive proposition. As of April 5th, investors can get exposure to all 16 of these stocks with just one click through HMMJ. Exchange traded funds make it easier to diversify by allowing investors to gain exposure to multiple stocks with just one transaction.
Because the majority of ETFs track indices they don't incur the expenses related with people picking individual stocks. The fund gets to pass that cost savings on to you.
ETFs also have significantly lower fees than other types of investment funds because they have lower operating expenses related to simplified back office processes. According to the fund's prospectus, "Horizons HMMJ pays an annual management fee to the Manager equal to 0.75% of the net asset value of Horizons HMMJ, plus applicable Sales Tax." Compared to the marijuana mutual fund's fee of over 5%, HMMJ provides investors serious savings on management fees for even better exposure to cannabis.
How to Trade ETFs
As we mentioned earlier, trading ETFs is as easy as trading a stock...place an order with your brokerage and you are all set. In the case of HMMJ, the one drawback is it is listed on the Toronto Stock Exchange, so if you aren't Canadian it's a bit trickier to access the ETF. That being said, quite a few brokers worldwide allow their clients access to stocks (and ETFs) listed on the TSX.
We hope this helped you grasp the basics of ETFs, and help you see why it's so exciting that the cannabis sector finally has its very own ETF. If any of your friends are interested in investing in marijuana stocks through HMMJ be sure to share this article with them using the links below. Also, be sure to connect with The Daily Marijuana Observer on social media using the links to the right of this article.