LEVERAGED AND INVERSE MARIJUANA ETFs

Are you having a hard time deciding if the MJ sector is still full of circus clowns and bears or about to bounce from here and make rocket emoji’s on pot stocks great again? You’re not alone! To follow up on my last blog I thought it might be useful for some of you to be aware that Horizon has leveraged and inverse marijuana ETFs. This could allow you to hold onto your beloved pot stock that is tanking but be offset by its counterpart. These ETFs allow us to take a more diversified bearish position with the inverse fund or alternatively a more bullish position with the leveraged fund. So essentially a basket of marijuana goodies whether you are feeling bullish or like a gummy bear (pun intended).

pot stock investors

About the ETFs:

BETAPRO MARIJUANA COMPANIES INVERSE ETF (TSX: HMJI)

Horizon’s description of the fund: 

“HMJI is designed to provide daily investment results, before fees, expenses, distributions, brokerage commissions, and other transaction costs, that endeavor to correspond to the single inverse (opposite) of the daily performance of the North American MOC Marijuana Index (TR). The Inverse ETF does not seek to achieve its stated investment objective over a period of time greater than one day.”

BETAPRO MARIJUANA COMPANIES 2X DAILY BULL ETF (TSX: HMJU)

Horizon’s description of the fund:

“HMJU is designed to provide daily investment results, before fees, expenses, distributions, brokerage commissions, and other transaction costs, that endeavor to correspond to a two-times multiple of the daily performance of the North American MOC Marijuana Index (NTR). HMJU does not seek to achieve its stated investment objective over a period of time greater than one day.”

What is an ETF?

For those of you that do not know and ETF stands for “Excellent Technical Foundations” something that I hope you have or are at least working on. OK, OK, ETF does not stand for “Excellent Technical Foundations”, but it sounds pretty good, and I do want you to feel comfortable with your technical abilities. ETF actually stands for “Exchange Traded Fund”. Essentially an ETF is a basket of securities such as stocks that tend to track a particular index. Perhaps the most common know ETF you have heard of is the SPY, which corresponds to the S&P 500 Index. In our case, we are referring to two different ETFs that track the North American MOC Marijuana Index. Don’t let the fancy name of an ETF confuse you. It’s rather simple. In our case, it’s basically a basket of stocks that trade all under one symbol. You can buy and sell this as simple as buying and selling the stock of Canopy Growth or Tilray for example. In fact, if you like this particular fund this simplifies the process for you as you would only need to buy and sell one fund as opposed to managing each individual stock that makes up the fund and in turn saving you time and commission fees.

Photo by Oleg Magni on Pexels.com

Noteworthy points and Considerations:

Let’s go over some of the high-level items you might want to take into consideration for these new ETFs.

First, you should know where to go if looking for in-depth details pertaining to these funds

Click here for the BULL fund 

Click here for the INVERSE fund

– Both of these ETFs work differently and have different risk levels that your standard buy and hold ETFs you may be used too. Make sure you understand that one is meant to work the opposite of the market directions and in the longer-term stocks are known (and hoped to) appreciate over time, while the other will magnify the movements.

– per Horizon: “HMJI, before fees and expenses, does not and should not be expected to return the inverse (e.g. -100%) of the return of its Underlying Index over any period of time other than daily.” The same logic applies to the HMJU fund as well surrounding 200% expectations. Thus the funds are recommended to be monitored daily which may or may not suit your particular circumstances.

– I have personally noticed that the L2 on these tickers currently poses a wider bid-ask spread than other ETFs. This may be in part to it being new. For those of you looking to place super tight entries and exits, this may not be the best method for you at the moment.

– The funds daily NAV is updated on their website so you know if you are buying at a premium or discount.

What’s inside of these ETFs?

To help us better understand what these ETFs are all about it is best that we take a look under the hood. Note that the latest update from Horizon’s website shows the list of securities below and this applies to the weighting of both HMJI and HMJU. It should be noted that these weightings are dynamic and subject to change as the funds rebalance. Here are the top 12:

Now that you understand what is in these funds you can have a better understanding if this is something that would work for you or not. You can see that the impact of Canopy will currently hold much more weight than say the impact that Hexo would have. This is something you would want to keep in consideration when using these funds and it could be wise to keep up with the happenings of the top holding in the fund to help gauge the direction of the funds. It is also important to compare and contrast your own individual holdings as well. Perhaps your holdings look very similar or drastically different. This will also play a role in how you can use these ETF’s within your portfolio. 

One thing you should do to have an understanding of the marijuana market sentiment is to keep up to date with news and legislation. Even on a social media level, this can be beneficial. Image Trump tweeting out that cannabis legalization federally is on his immediate agenda. If we drill down further we will want to keep track of the news, evaluations, so on and so forth for the specific companies within HMJI and HMJU. It would be wise to give more attention to the heavier weighted companies within the fund, and what better way to do that then to add them to your very own list so you can track and also visualize them. Below you will see the current top 12 companies within the funds:

Not only can you use the glance of all the companies as a reference point to follow up on their news you can also use it to quickly view their corresponding charts to spot for bullish or bearish setups in place. I always recommend that you combine both your fundamental and technical analysis of your investments for the best results. Perhaps one way you can gauge the sentiment of the charts technically speaking if to comb through each one and quickly jot down if it is bullish, neutral, or bearish for your intended trading period. This should be a weighted exercise, of course, giving more weight to the companies at the top of the list accordingly. Let’s say for argument’s sake you see Aurora as bearish, you award no points. You see GW pharmaceuticals as neutral, so you award half its weighting so 6.49 (12.98 / 2). And suppose you see Canopy Growth as bullish, you would allocate the full 11.15 points. You repeat this process throughout the list of companies based on your technical interpretation and then sum up the total weighted number you get. If you end up with a really high number closer to 100 then you are clearly bullish. On the flip side, if you end up with a really low number closer to zero then you would be bearish. This process can also be combined with your fundamental analysis too and then take an average to help yield the best results. Albeit, doing constant rehashes of fundamental analysis may be more time consuming for many of us, part of the reason why I love technical analysis so much.

Bearish outlook:

If you have a bearish outlook on the marijuana stocks then your new best friend could just be HMJI (the inverse fund). 

Question: How did the panda lose his dinner? 

Answer: He was “Bamboozled”!

Photo by Pixabay on Pexels.com

OK, and on that bearish note lets’ put on our bearish thinking caps and dive into some trading thoughts. While it is possible that you could open up a short position against individual stocks or even purchase put options, not every trader is entitled or has the ability or aptitude to do this successfully. Wrapping this all up in one ETF can make the process much more streamlined and simplified for a trader. Some of the benefits of being bearish via an ETF as opposed to actually shorting stocks include:

–       Reduced commission fees (unless only shorting one individual stock)

–       Less individual stock risk, as the ETF contains a bucket of companies and an unexpected company-specific event will not be as drastically felt as if you held an open short position on it in the the event they are offered a bought deal at a higher price for example.

Remember Tilray being seemingly overvalued but running up 300. It would be painful to have a margin call there. Yikes!

When you short a stock the potential of your loss is theoretically endless as there is no cap on how high a stock could trade. Whereas as an ETF is like a stock. It could go all the way to zero. If it goes all the way to zero you lose all of your initial investment. Still better than a theoretical infinite loss though

Hedge:

One thing you may want to consider when you are uncertain about the near term future of the marijuana sector is to hedge your investments. So for example, you could remain long on companies X, Y, and Z, but also keep an open position in HMJI as a hedge. With a hedge, you can expect to reduce the volatility and help cancel out the noise in the day to day price movements. Even if all of the marijuana companies are sinking or rocketing, assuming your individual picks are a better performer than the overall sector as defined by the contents within the HMJI ETF then you will stand to make gains. This is not guaranteed to work and nor can I guarantee anything of this nature as I am not your professional advisor. However, this could be an approach worth considering when you are uncertain or feel the overall sector is not overly bullish but are still bullish on your specific companies you are invested in – at least more than the rest.

Extra Bullish outlook:

If you have a bullish outlook on the marijuana stocks then your new best friend could just be HMJU (the 2X leveraged fund)

Question: Where did the bull lose all his money? 

Answer: At the “Cowsino”. 

Photo by Jahoo Clouseau on Pexels.com

Unlike the bull in the joke above you obviously, want to make money from your investments. What happens when you are feeling overly optimistic or bullish about the marijuana sector and all of the fundamental and technical pieces are aligning together ever so perfectly? Well, we now have a new option for you, the leveraged HMJU fund. With this fund, you can expect approximately the value of the gains you see as the companies go up in value to double. Of course, the opposite will be true if you are wrong. Again, we know you are constantly improving your technical analysis, so the odds of you being correct are ever-improving. Some of the benefits of being bullish via an ETF as opposed to actually taking out a loan to leverage your account on individual stocks include:

–       Reduced commission fees (unless only purchasing one individual stock)

–       No borrowing costs to leverage your position.

–       Less individual stock risk as the ETF contains a bucket of companies and an unexpected company-specific event will not be as drastically felt as if you were leveraged on only one specific position. For example, imagine a company you are leveraged on announces a crop failure or are being sued.

When you leverage a stock using borrowed funds and the trade goes against you, you not only risk losing all of your money but the money that is borrowed and not yours, to begin with. With the ETF you can be leveraged but only ever lost the maximum of what you put in.

Thanks for tuning in and checking out my blog – I really appreciate any support, feedback or critism. Here is the comedic chart I made which made me realize that these ETFs should be revisited.

Disclaimer: I am not a certified comedian – please consult a comedian before having a laugh – same applies to any financial advice you might take away from my posts.

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