Horizons Files Prospectus To Launch 2x Leveraged and Inverse Cannabis ETFs

Benjamin A. Smith

In yet another sign the cannabis sector is being financialized like any other, Horizons ETFs Management (issuer of the benchmark Marijuana Life Sciences Index ETF – HMMJ) has filed a prospectus to launch leverages and 2x inverse leveraged cannabis ETFs in Canada. If successful, the derivative may become the country’s hottest daytrader and short-term hedging conduit for some time.

Horizons ETFs Management announced its plans via pre-market press release. The organization said it had filed a preliminary prospectus last week to launch three new ETFs that provide leveraged, inverse and inverse leveraged exposure to Canadian-listed Marijuana companies as represented by the Solactive Canadian Marijuana Companies Index. The latter is an index of investable equity securities of Canadian Marijuana companies listed on a Canadian exchange. If the application is successful, the described products will be branded under Horizons ETFs’ family of tactical BetaPro ETFs.

The inverse leveraged ETFs may be of interest to a small—but voracious—cadre of bears who insist Canadian cannabis stocks are overvalued. Such a product would provide a convenient way to bet against the sector without having to borrow individual company shares short. But that doesn’t mean it won’t still be expensive: Horizons predicts “hedging costs incurred by a counterparty and charged to HMJI or HMJD, as applicable, and indirectly borne by unitholders, are expected to be material, and will be between 10% and 25% per annum of the aggregate notional exposure of HMJI or HMJD’s forward documents, as applicable.”

On a leveraged basis, that premium rises to between 20-50%.

Thus, bears eager to bet against the market should be very cautious if such a product eventually comes to market. Not only is shorting Tier-1 cannabis stocks a risky venture, returns on correct short investments won’t yield anywhere close to 2:1 gains since the cost to borrow cannabis shares remains stubbornly high. The longer one holds leveraged ETFs of any type, the greater the beta slippage of compounding negative returns over the duration of the holding period.

Exemplifying this point clearly, Horizons ETFs Management clearly states that before fees and expenses, investors should not expect to see returns of two times (i.e., +200%) or two times the inverse (i.e., -200%), as applicable, the return of their underlying index over any period of time other than daily.

HMMJ Futures Now Part Of The Cannabis Investing Landscape

In the same press release, Horizons announced that futures on units of HMMJ begin trading today on the Montreal Exchange. Futures contracts on HMMJ will be available with quarterly expiration dates, in January, March, June and September – initially extending to a June 2019 expiry.

This product will be of particular interest for cannabis investors wishing to hedge (or partially hedge) the price of a basket of defined securities against forward price dislocations. Since many investors may not wish to sell their holdings (due to tax reasons, long term investment goals etc.)—even though they suspect price may head lower in the short term—futures contracts provide suitable insurance to lock-in portfolio gains without having to sell off individual assets.

Faircourt Asset Management Inc CEO Charles Taerk talks about how the company launched the first Cannabis-focused mutual fund – the UIT Funds which invest in cannabis companies among other things.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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