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Why Marijuana ETF is on a High in 2019

After being beaten down in the final quarter of 2018, pot stocks staged a nice comeback at the start of this year on the renewed appeal for riskier assets. Notably, these stocks recorded their third consecutive week of gains, the longest winning streak since August. ETFMG Alternative Harvest ETF MJ — the first and only pure ETF targeting the cannabis/marijuana industry — climbed 21.4% so far this year (read: Best & Worst Performing ETFs to Start 2019).

The massive strength came despite disappointing earnings from Aurora Cannabis and Aphria APHA. This is because investors are capitalizing on the huge potential of the global cannabis industry with the beaten-down stocks.

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 37 securities in its basket and Canadian firms make up for 57% of the portfolio, while American firms comprise 33%. The ETF has AUM of $756.5 million and trades in a good volume of around 820,000 shares. It charges 75 bps in annual fees.

Inside The Surge

The pot industry is emerging and poised for rapid growth given its widespread legality. Though cannabis remains illegal at the federal level in the United States, 10 states and the District of Columbia have legalized recreational marijuana while 32 states have legalized medical weed. Recreational marijuana is expected to be legal soon for adults over the age of 21 years in New York as well (read: After a Landmark 2018, Will Pot ETF See Same High in 2019?).

Canada is 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. In late November, the European nation of Luxembourg announced that marijuana would soon be legalized for recreational use by adult residents.

Additionally, with the FDA's first approval of a cannabis-derived drug and President Trump's signing of the Farm Bill legalizing hemp and hemp-based cannabidiol (CBD) oil, the cannabis industry looks more encouraging. All these developments have spurred a large number of deal activities, including mergers and acquisitions in the industry.

A number of alcoholic beverage companies are investing or partnering with cannabis producers. Among the latest deal, Aurora Cannabis agreed to buy Whistler Medical Marijuana Corp. in a stock deal valued at up to C$175 million ($131.8 million). Canopy Growth CGC plans to invest up to $150 million in New York to target the emerging market for cannabis products derived from hemp and CannTrust CNTTF plans to list its shares on the New York Stock Exchange. Meanwhile, marlboro cigarette maker Altria Group MO is mulling over an acquisition of Canadian cannabis firm Cronos Group CRON (read: Cronos-Altria Deal Boost Marijuana ETF: Will This Continue?).

Further, Coca-Cola KO and Diageo DEO have been eyeing for a stake or forming partnership to produce cannabis-infused beverages. Constellation Brands STZ has already invested $3.8 billion to increase its stake in Canopy Growth.

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 $80 billion in sales by 2030, surpassing the carbonated soft drink market in 2017. An analyst at Haywood Securities foresees exponential growth in cannabis stocks with the U.S. cannabis market expected to be worth between $15.9 million and $21.7 billion by the year 2022 (read: Another Cannabis ETF on the Way).

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