Timing is everything…

This phrase can be applied to an infinite number of situations but today we want to focus on Horizons Medical Marijuana Life Sciences ETF (HMMJ.TO: TSX) (HMLSF: OTC).

When it comes to investing, timing and selectivity are two major keys for success. Although this is especially true for marijuana stocks, the ETF missed the mark…badly.  

From a timing standpoint, the ETF could not have launched at a worse time as marijuana stocks were trading near their 52-week highs and it is down more than 15% since it started trading. 

From a selectivity and strategy standpoint, the ETF was structured incorrectly and investors are the one paying for this mishap.

Cash is Not an Asset in the Marijuana ETF

The major issue for Horizons Medical Marijuana ETF is not related to timing or its holdings. Our biggest concern when it comes to the fund is its structure. While we agreed with most of the holdings, the way it was allocated created more questions than answers.  

The fund is an index ETF and these types of passively managed funds are not suited for an industry as volatile as the cannabis industry. Horizons Medical Marijuana ETF is rebalanced quarterly on a market-capitalization basis and no single stock can exceed 10% of the portfolio’s weight when rebalanced.

When the ETF started trading, it was fully invested and six stocks represented 60% of the holdings. We were surprised by this and expected a portion of the assets to be held in cash and the lack of diversification has negatively impacted shareholders. Three of Horizons largest holdings have fallen more than 20% since it started trading.

Cannabis Stocks are Not Suited for Passive Investing  

Although there was a lot of hype around Horizons Medical Marijuana ETF, we urged caution due to the structure, allocation, and valuation. Cannabis investing is not suited for passive investors and it is definitely not suited for a fund. Based on how the fund has recently performed, it would be nice if it could be rebalanced at will.

The fund selected 15 stocks from a universe of publicly-traded companies focused on the cannabis industry. More than 50% of the ETF’s holdings have fallen more than 20% since the fund started trading.

Only two of the ETF’s holdings are up since it launched (Insys Therapeutics and ICC International Cannabis) and three of the holdings are down more than 15% but less than 19%.

Investment Concerns Prove to be Legitimate

Although we agreed with many of the ETF’s holdings, a few seemed to be out of place and this was especially true for Maple Leaf Green World Inc. (MGW.V) (MGWFF). Even though the fund provided Maple Leaf a small allocation, the fact that it was included raised enough red flags for us to be on the sidelines and cautious with the ETF.

Yesterday, our concerns with Maple Leaf Green World came to fruition when the company’s consulting agreement was terminated by TheraCann International Benchmark, a full service international cannabis consulting company.

TheraCann said that the termination was due to a material breach of contract and that Maple Leaf did not operate in good faith and failed to fulfill their obligations. TheraCann said that Maple Leaf misled the company in regards to its ACMPR application, utilized its reputation to raise capital without fulfilling any commitment to using its service, and failed to pay for services rendered.

Bad Timing, Worse Returns

The holdings in Horizons Medical Marijuana ETF raised concerns but was not the most significant red flag. One of our biggest concerns is related to the core investment strategy and this continues to be a concern for us. Although we are favorable on several of its holdings, the timing of its investments could not have been worse from a valuation standpoint.

Although GW Pharmaceuticals (GWPH) is one of the most attractive investment opportunities, most of the company’s catalysts will occur in the back half of 2017 and we are not surprised by the 25% pullback in the last three months.

If we were Horizons, we would have never provided GWPH a 10% allocation at the price it was purchased at. This statement also holds true for the five other stocks that received a 10% allocation from the fund (Aurora Cannabis, Aphria, Canopy Growth, Insys Therapeutics, and Scotts Miracle-Gro).

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