Canada: New leveraged marijuana ETFs on the way

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Investors looking to leverage the marijuana industry can soon do so, with three new exchange-traded funds (ETFs) set to launch later this summer.

Horizons ETF Management Canada Inc. filed preliminary documents with regulators last week to launch three new ETFs on the Toronto Stock Exchange that will focus on leveraging the cannabis sector.

Leveraged ETFs – also known as “double ETFs” – typically aim to deliver two or three times the return on their stated index, and carry a higher risk rating than typical ETFs.

Horizons ETFs is the only provider of leveraged ETFs in Canada, with 25 leveraged funds on its shelf. The three new funds will be in line with the existing BetaPro fund lineup, and have a management fee of 1.15 per cent. The funds will include: BetaPro Canadian Marijuana Companies 2x Daily Bull ETF (HMJU), BetaPro Canadian Marijuana Companies -2x Daily Bear ETF (HMJD) and BetaPro Canadian Marijuana Companies Inverse ETF (HMJI).

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“Clearly, marijuana-equity focused ETFs have been popular,” says Steve Hawkins, president and co-CEO of Horizons ETFs. “Given the underlying volatility of this sector we believe there is demand from Canadian investors to take on more risk using leveraged ETFs to attempt to generate potentially higher short-term returns very much like they have done with gold mining stocks.”

The majority of people who buy leveraged or inverse funds are self-directed investors with short-term investment horizons, and the fund’s investment prospectus warns them about the risks involved with this type of investment.

HMJI seeks to provide investors with results that correspond to one times (100 per cent) the inverse (opposite) of the daily performance of the Solactive Canadian Marijuana Companies Index. 

Each leveraged fund employs absolute leverage that generally does not exceed two times the net asset value of that ETF. HMJU seeks to provide investors with daily investment results that correspond to two times (200 per cent) the daily performance of the Solactive Canadian Marijuana Companies Index, while HMJD aims for 200 per cent of the inverse of the daily performance of the underlying index.

For example: If HMJU is successful in meeting its investment objective, its net asset value should gain approximately twice as much, on a percentage basis, as the Solactive Canadian Marijuana Companies Index when the index rises on a given day. Conversely, HMJU’s net asset value should lose approximately twice as much, on a percentage basis, as the Solactive Canadian Marijuana Companies Index when the index declines on a given day.

“The other thing we’ve noticed is there is significant demand from investors to ‘short’ marijuana stocks,“ Mr. Hawkins says. “The Horizons Marijuana Life Sciences Index ETF (HMMJ) has actually benefited from this shorting demand by lending out its portfolio holdings earning an attractive stock lending revenue for its unitholders.”

“Shorting marijuana stocks is an expensive and complex process. If used appropriately, inverse marijuana equity ETFs could be a potentially more liquid and easier way for investors to get short exposure to Canadian-listed marijuana stocks while limiting their risk to what they invested."

Horizons launched the world’s first marijuana-focused ETF – the Horizons Marijuana Life Sciences Index ETF – last April. The fund, which goes by the ticker HMMJ, saw more than $100-million in assets under management within the first month. Earlier this year, the company launched its second marijuana-focused fund, this time tapping into small-cap companies in the industry with the Horizons Emerging Marijuana Growers Index ETF (HMJR).

Leveraged and inverse ETFs made headlines earlier this year, after a one-day stock market plunge of 1,175 points was attributed to leveraged volatility-investment products.

Horizons’ own product, the BetaPro S&P 500 VIX Short-Term Futures Daily Inverse ETF (HVI) saw most of its assets wiped out in less than a day, and was later terminated.

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