Cannabis ETFs are surging in September following the U.S. Department of Health and Human Services’ recommendation to ease marijuana restrictions. This marks a turnaround for the industry, which has faced slow growth and even losses in recent quarters. Leading ETFs, such as ETFMG Alternative Harvest and AdvisorShares Pure US Cannabis, have outperformed major indices. The HHS recommendation has raised hopes for broader federal reform, including the Secure and Fair Enforcement Banking Act. However, the sector’s future momentum depends on timely updates from the DEA, and prolonged silence could result in stagnation.
Cannabis Exchange-Traded Funds (ETFs) are experiencing a significant surge in September, marking a stark reversal from months of dwindling investor interest in the sector.
The remarkable upswing in these funds can be attributed to a pivotal development last month when the U.S. Department of Health and Human Services (HHS) recommended relaxing restrictions on marijuana. This recommendation followed a review of marijuana’s classification under the Controlled Substances Act. It represents a rapid shift for an industry that has been operating in a quasi-legal gray area due to the sluggish pace of federal reform. This surge in interest comes after several quarters of sluggish growth, and in some cases, losses for certain funds.
Notably, ETFMG Alternative Harvest (MJ) and AdvisorShares Pure US Cannabis (MSOS) have outperformed the Dow Jones Industrial Average and the S&P 500 by a significant margin so far this quarter, with MJ and MSOS witnessing remarkable gains of approximately 47% and 56%, respectively, while the Dow and S&P have seen only marginal increases of around 0.5%.
Canaccord Genuity analyst Matt Bottomley commented, “This is essentially a continuation of what’s the most influential factor driving the trading of these stocks, which are federal catalysts. The pace at which these federal headlines are unfolding is having a significant impact.”
The announcement from last month also led to an uptick in the share prices of several cannabis companies, including Canopy Growth, Tilray Brands, and Cronos Group.
In recent years, the cannabis equities market has faced challenges as many investors withdrew from the sector, leading to a shortage of capital. Despite 39 states legalizing marijuana for recreational or medical purposes, the industry has struggled due to its Schedule I classification and federal prohibition, which have restricted access to financing and a broader market.
AdvisorShares, the largest cannabis fund manager, had to close its Poseidon Dynamic Cannabis ETF last month, liquidating its assets and distributing proceeds to shareholders on September 1. Morgan Paxhia, the fund’s co-founder, noted that the closure was influenced by the broader macroeconomic environment and the significant shift in investor sentiment affecting the cannabis industry.
The HHS recommendation, made at the direction of the Biden administration and conveyed in a letter to the Drug Enforcement Agency (DEA), has given stakeholders hope for more comprehensive federal reform in the near future. Possible changes include the Secure and Fair Enforcement Banking Act (SAFE), a congressional bill that would permit banks to offer services to legal marijuana businesses. As long as federal laws remain unchanged, substances categorized under the Controlled Substances Act pose a risk to banking institutions.
Sundie Seefried, CEO of Safe Harbor Financial, a digital-first commercial banking institution, commented, “Each time legislation like the Safe Banking Act has been introduced, we’ve witnessed a corresponding increase in investor interest. This milestone could mark a turning point by providing the much-needed stability in the regulatory environment that investors have long been seeking.”
The SAFE Banking Act is currently making its way through Congress, with a Senate Banking Committee vote expected soon. Meanwhile, the DEA has initiated a review of marijuana’s classification and will submit a proposal to the attorney general, who has the final authority to reclassify it.
Bottomley noted that as these processes unfold, it is increasingly likely that institutional capital that had previously been hesitant to invest in the sector will enter the market. However, the momentum’s continuation will depend on whether the DEA provides further updates in a timely manner. If the sector faces radio silence well into the fall and then into January, it might experience a period of stagnation, according to Bottomley.