ETFs can be a good option but when it comes to marijuana stocks it is better for buyers to be informed
Marijuana exchange-traded funds (ETFs) offer investors a way to dabble in multiple stocks in the segment all at once. While ETFs provide greater diversification and lower risk compared to buying individual stocks, there are downsides to this option that investors should be aware of before they buy.
Leading ETFs Have High Expenses
The leading marijuana ETFs have much higher expense ratios than their competition. These bundles are banking on the renown of their name to charge up to 84 percent more for their services. While several ETFs post expense ratios less than 0.10 percent, Horizons Marijuana Life Sciences EFT is as high as 0.94 percent.
ETFs Have Overvalued Stocks
Some of the most popular ETFs are loaded down with stocks that have large market caps. Stocks such as Aurora Cannabis, Canopy Growth, Tilray, and Aurora are not the best ETF options for investors because of their high risk for volatility and high market caps. This mostly negates the diversification and risk reduction that attracts investors to ETFs in the first place.
ETFs Avoid the US Market
Most ETFs would leave investors out of the marijuana market with the greatest potential – the United States. In an attempt to promote risk management, many ETFs stick to Canadian stocks and ignore the fact that the U.S. currently accounts for 80 percent of total marijuana sales.
Alternatively, investors can benefit from lower expenses, choose stocks that have more rational valuations, and focus on the U.S. cannabis market when they buy individual stocks.