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Roundhill's Cannabis ETF (WEED) Launch Seems Timely

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On Apr 20, Roundhill Investments announced the launch of its own cannabis ETF, namely Roundhill Cannabis ETF (WEED - Free Report) . The launch seems timely as the space is on a high due to the passage of legalization bill by the House, though it is still to be okayed by the Senate.

The House bill, called the Marijuana Opportunity Reinvestment and Expungement Act, or MORE Act, would remove marijuana from the list of banned controlled substances and establish a process to expunge prior cannabis convictions. It also will impose a federal tax on marijuana products —a 5% excise tax for the first two years, increasing by 1% incrementally each year over the next three years.

Inside WEED

The fund looks to invest in various cannabis-related companies, including: (i) cannabis producers and distributors, (ii) cannabis-related technology companies, and (iii) additional cannabis related ancillary businesses, per the issuer.

The 24-stock fund has high concentration risk, with the top three holdings taking about 20% of the fund. The net expense ratio is 59 bps.

How Does It Fit in a Portfolio?

The global legal cannabis market is expected to generate more than $61 billion in sales by 2026, more than doubling 2021's $29 billion in sales, per BDSA, as quoted on Overall, marijuana is legalized for recreational use in 18 states and is legalized for medical use in 38 states.

Pro-regulatory wind is expected to flow in the coming years, with the densely populated Tri-State market (Connecticut, New York, New Jersey) expected to come online in 2022 and 2023. Legal U.S. cannabis sales are expected to surpass $28 billion in 2022, (per Bloomberg Intelligence, BDSA), as indicated by Roundhill Investments.

Given the rising number of countries decriminalizing and legalization spreading, cannabis stocks are set to soar. Global cannabis sales are projected to reach more than $35 billion in 2022, reflecting a 22% increase from last year, according to BDSA’s most recent five-year rolling market forecast update. For 2026, U.S. cannabis sales are expected to reach $46 billion at a CAGR of 14% from 2021.

A slew of acquisitions announced in recent weeks added to the strength. Cresco Labs is set to acquire Columbia Care for $2 billion, while Aurora is in the process of buying TerraFarma in a $38 billion cash-and-stock deal.

Can the Fund See Success?  

Any rally and further success from here depend on how things progress in the United States legally as investors focus shifted toward opportunities in the United States, the world’s largest cannabis market (one-third of global demand).

However, the space is teeming with competition. AdvisorShares Pure US Cannabis ETF (MSOS - Free Report) is the largest ETF by size with $885 million in assets, followed by the oldest fund ETFMG Alternative Harvest ETF (MJ - Free Report) with about $619.8 million.

However, WEED charges lesser than many funds. Only POTX (with an expense ratio of 51 bps) and Cambria Cannabis ETF (TOKE - Free Report) (charges 42 bps in fees) charge even lesser than WEED. The most pricey ETF here is AdvisorShares Pure Cannabis ETF (YOLO - Free Report) , charging 76 bps in fees. 

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