The pot ETF is poised to go mainstream, analysts say

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The fund industry is getting more relaxed about marijuana investment.

BlackRock is “likely” to start a cannabis-focused ETF, as concern about the legality of such strategies starts to fade, according to Bloomberg Intelligence. Other large issuers could follow, boosting assets in pot ETFs to $5 billion over the next few years, analysts led by Eric Balchunas wrote in a report.

“Like a big movie studio, BlackRock is apt to copy others’ successful theme ETFs,” wrote Balchunas. “BlackRock coming in would add some legitimacy along with some fee pressure.”

A spokesman for the money manager said the firm has no plans to offer a marijuana ETF.

It all sounds a bit pie in the sky, but BlackRock is investing in thematic strategies. These types of funds have quickly become big business, attracting more than $49 billion in the U.S. Last month, the money manager said that it plans to create and market ETFs based on five “megatrends,” which go beyond traditional sectors and geographic focuses, although none of these explicitly dovetails with cannabis stocks.

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Meanwhile, the legal environment for pot funds is looking much friendlier. Conflicting U.S. laws around weed had encouraged big banks to shy away from providing custody services to would-be issuers of marijuana ETFs. But now U.S. regulators are asking pot ETFs to produce third-party legal opinions verifying that they don’t violate state or federal laws, offering welcome cover for anyone thinking about dipping a toe into the booming industry.

The world’s largest weed ETF, the $1.1 billion ETFMG Alternative Harvest ETF, submitted legal documents in May stating that the ETF and its investments did not run afoul of any laws. The cannabis companies it invests in all have necessary permits and licenses to operate, according to the filing. The $59 million AdvisorShares Pure Cannabis ETF (YOLO) submitted a similar letter in April.

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The ETFs that bested the strategy “offer exposure to extremely narrow and volatile segments of the market,” an expert says.

“The outside legal opinions can provide cover,” said Todd Rosenbluth, director of ETF research at CFRA Research. “Consistent with what we’ve seen with other thematic ETFs, the smaller, more narrowly focused ETF providers will spot a theme and then launch products, and at some point it will hit the radar for the big boys.”

So far, smaller issuers have dominated issuance. A new fund from OBP Capital, a unit of the Nottingham, started trading this week, and Global X Management also wants to bring a cannabis-themed ETF to market, regulatory filings show.

Any entry by BlackRock would shake up the nascent category, and only about two or three products will win out, Balchunas wrote. Investor interest could begin to fade within the next couple of years, spurring a “day of reckoning” for pot ETFs, according to Daniel Straus, vice president of ETFs and financial products research at National Bank of Canada.

Bloomberg News
Thematic investing Marijuana banking ETFs Asset managers Regulatory actions and programs SEC BlackRock Money Management Executive