Pummeled pot ETFs face worse ahead after Senate banking letdown

Bloomberg News

Cannabis ETFs endured steep losses this year alongside other risky bets, but the onslaught accelerated in December after a regulatory disappointment.

Both the $467 million AdvisorShares Pure U.S. Cannabis ETF (ticker: MSOS) and $1.4 million Roundhill Cannabis ETF (WEED) are down nearly 50% from Dec. 5 highs after rallying on an end-of-year push by Senate lawmakers to attach a marijuana banking bill to a must-pass government funding package, which ultimately failed. MSOS, the largest pot exchange-traded fund, lost $7.4 million of assets in its latest session, the biggest outflow since April.

With the legislation — which would have prohibited federal regulators from penalizing banks for providing services to legal cannabis businesses — once again off the table, the setup for pot-themed funds next year is bleak. Marijuana-linked firms are facing the same tough market and interest rate uncertainties as other growth-oriented businesses.

"Pot stocks were part of the 'speculative bubble' that popped last year and that has continued throughout 2022," said Todd Sohn, a technical analyst at Strategas Securities. "There's no reprieve here yet, and the groups involved continue to suggest there's no new liquidity cycle imminent, that is, the Fed isn't coming to the rescue."

Sohn likens cannabis firms to other investments including long-duration technology companies, SPACs and Bitcoin miners, all of which have gotten crushed this year as financial conditions tightened. And 2023 could be another bumpy ride.

"The difficult part will be navigating the bear market bounces that come with a sector being cheaply valued — and the mental fortitude to stay involved," Sohn said.

Also hitting pot stocks is the growing cheapness of marijuana. Low prices and the proliferation of sellers is putting the legal market for cannabis under pressure.

Still, the price slump for pot ETFs has been so severe that they may start looking attractive heading into 2023. Cannabis stocks could become "just too cheap to ignore, particularly as growth opportunities are less certain elsewhere in the economy," wrote BTIG analysts led by Jonathan DeCourcey.

The analysts expect regulators may reconvene over the pot bill in the latter half of 2023.

That could drive more price swings in MSOS and WEED, according to James Seyffart of Bloomberg Intelligence. He expects the two funds "will react most aggressively and have the highest beta to U.S. regulatory and legal decisions because they are the most concentrated ETFs that hold multistate operators."

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