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Marijuana ETF Enters Bear Territory: What Lies Ahead?

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After an astounding surge over the past few months, marijuana ETF took a beating on Monday’s trading session. This is especially true as ETFMG Alternative Harvest ETF (MJ - Free Report) — the first and only pure ETF targeting the cannabis/marijuana industry — plunged 9.4%, marking its second-worst day ever. The decline came as investors are booking profits after marijuana become fully legal in Canada on Oct 17 (read: Canada Legalizes Marijuana: Stocks & ETF in Focus).

In fact, marijuana ETF has declined 20% over the past week, indicating that it has entered the bear territory.

MJ in Focus

The fund tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem, benefiting from global medicinal and recreational cannabis legalization initiatives. The fund holds 39 securities in its basket and Canadian firms make up for 64.9% of the portfolio, while American firms comprise just 18.8%. The ETF has AUM of $790.1 million and trades in a good volume of around 522,000 shares. It charges 75 bps in annual fees.

Stocks Led the Decline

Tilray Inc. (TLRY - Free Report) stole the show, plunging more than 15.6% on the day. It occupies the second position with 9.5% share in the fund’s portfolio. Shares of Aurora Cannabis, which officially trades in Toronto and is planning an IPO on a U.S. exchange, fell 12.8% at the close of day. Aurora Cannabis takes the top spot accounting for 10.2% of total assets. Canopy Growth (CGC - Free Report) and Cronos Group (CRON - Free Report) shed 11.2% and 12.3%, respectively. The stocks take the third and fourth positions in MJ, making up for 9.4% and 8.3%, respectively (read: Pot Stocks & ETF: Risks and Rewards).

With the decline, these stocks have lost more than 20% in the past week, with Tilray and Aura losing more than 25% of its value in the past five days. CRON and CGC are also down at least 27% over the past week.



What Lies Ahead?

Despite the slide, the cannabis ETF is up more than 24% over the past three months and the outlook remains bright. This is because the pot industry has been emerging and is poised for rapid growth given its widespread legality. Though cannabis remains illegal at the federal level in the United States, nine states and the District of Columbia have legalized recreational marijuana while 30 states have legalized medical weed. Canada is now the second country in the world to legalize the drug for both medical and recreational use, trailing Uruguay and the first country among the G-7 nations (read: Top & Flop Zones of Q3 & Their ETFs).

According to the Arcview Market Research, the U.S. legal cannabis market is projected to reach $11 billion in consumer spending this year and more than $23 billion by 2022. Per an analyst at Cowen, the U.S. legal cannabis industry is expected to reach $75 billion in sales by 2030, surpassing the carbonated soft drink market in 2017.

Growing legalization of recreational or medical marijuana has paved the way for a merger mania, spurring a large number of deal activities in the industry. A number of alcoholic beverage companies are investing or partnering with cannabis producers. Coca-Cola (KO - Free Report) is reported to be in talks with Canada’s Aurora Cannabis to develop cannabidiol-infused beverages, while Diageo (DEO - Free Report) is also in talks with three Canadian pot producers for buying a stake or forming partnership to produce cannabis-infused beverages. Constellation Brands (STZ - Free Report) recently invested $3.8 billion to increase its stake in Canopy Growth (read: ETFs & Stocks to Tap Marijuana Boom).

Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk-tolerant, long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.

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