VIDEO: Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) World’s Largest Cannabis Asset Management Company
Horizons ETFs Management Canada Inc CEO Steve Hawkins manages the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) (OTCMKTS:HMLSF), a safer way for investors to play in the cannabis space. The Horizons Marijuana Life Sciences Index ETF provides diversified exposure to 49 cannabis and cannabis ancillary companies including some of the industry’s leading players. The ETF is the largest single holder of industry leaders like Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E), Aurora Cannabis Inc (TSE:ACB) (OTCMKTS:ACBFF) (FRA:21P), and Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1). As a result, the Horizons Marijuana ETF is the largest cannabis asset management company in the world. Horizons recently launched an ancillary, small-cap ETF (HMJR), focusing on the junior cannabis space and featuring companies with a market cap between $50 and $500 million.
James West: Hey, welcome back to Midas Letter Live. My guest in this segment is Steve Hawkins. He’s the CEO of Horizons ETFs Management Canada, who, among other ETFs, manages the Horizons Marijuana Life Sciences Index ETF trading on the TSX under the symbol HMMJ. Steve, welcome to the show.
Steve Hawkins: Thank you very much for having me, today.
James West: So an ETF is, to put it most simply, a safer way to play the cannabis space?
Steve Hawkins: Absolutely. It provides you diversified exposure to a number of names in the sector, and this is a new sector. As it’s evolved in the Canadian marketplace, you know, the Canadian regime capital markets has significantly taken a nice foothold into the cannabis sector as we now approach recreational legalization. But you know, the true fact is, you know, an ETF is a mutual fund, but it’s listed on the stock exchange. It gives you intra-day liquidity so you can buy and sell during the day, not just at 4:00 like a normal mutual fund. And it provides you diversified exposure to a basket of securities in the cannabis industry.
Currently right now, we have 49 different cannabis or cannabis ancillary companies in the portfolio.
James West: Okay, so you were talking to me before the segment began that you’re the largest single holder of Aphria, Canopy Growth and Aurora, as well?
Steve Hawkins: Yeah, and Cronos. I mean, our ETF is almost $1.1 billion; that makes us the largest cannabis asset management company in the world, and the single largest institutional holder of all of these different individual companies – which also makes us the largest securities lender on the Street.
James West: Uh oh. Here you are –
Steve Hawkins: So companies that are held in our portfolio, and we are generating somewhere between a 5 and 10 percent yield on non-dividend-paying stocks by lending out their securities to the short sellers in the marketplace who, I’m not sure that I would take a chance of short-selling a marijuana stock, but there’s a lot of people that are doing that, and we are –
James West: There’s one I want to short, which I won’t talk about here because I don’t want to tell everybody. But so, if – that’s interesting. So you’re probably one of the best guys on the Street to call to find out what the cost to borrow is on any given marijuana issuer.
Steve Hawkins: Pretty much, every day.
James West: Really! Well we’re going to have to talk more.
Steve Hawkins: It’s a big part of our business, and working with the banks who are holding onto our securities and actually facilitating the lending. But, you know, when a corporate transaction happens, like Aurora buying MedReleaf, there are many individuals who are long a big block of MedReleaf and want to hedge that position out, so they’ll short it at current market prices, and they’ll pay a negative borrow cost for that hedge for, let’s say, the time of period until the transaction closes, till they get their Aurora shares. So, let’s say, 90 days, 120 days, and they will pay me a fixed negative percentage amount for that period of time.
And that amount can be huge. You know, I mean, when Tilray spiked up to over $200, the borrow on Tilray was over 150 percent. So they were saying, you were losing 150 percent on an annualized basis, so, maybe, you know, only 0.5 percent for a day, but that’s still a huge amount of potential returns that you’re giving up. You know, the stock has to go up 150 percent just for you to offset that negative borrow cost.
James West: Right. Or go down.
Steve Hawkins: Go down, yeah, exactly.
James West: Interesting. So what percentage of the $1.1 billion that you manage is institutional versus individual versus –
Steve Hawkins: Retail advisors.
James West: Retail advisors…
Steve Hawkins: Yeah. Those are really the three different buckets. So, the direct investor; we now, because from a reactive basis, retail advisors are really starting to enter into the space because their clients are asking them to provide exposure to marijuana stocks, to cannabis companies. You know, the direct investor, I would say almost 50 percent of our assets that came into the fund initially were based through direct investors – individuals. And then we had some institutions that were taking some short-term tactical plays and using our ETF as a play on the industry, primarily from a long position.
But I think the single biggest growth aspect over the past six months for us has really been penetration into the retail advisor channel. And it’s not because the banks want to sell cannabis companies or our ETF, it’s because their clients are specifically asking the retail advisor, “We want exposure to marijuana” and the retail advisor is saying, “Well, I don’t know anything about any of these individual companies other than the rumours and the news articles, so I’m not really comfortable in picking one or two or three different names for you in a basket, but here is an ETF that provides broad, diversified exposure to the cannabis sector, and I think this is what – if you want to have access to the cannabis sector, I would recommend that you buy HMMJ and I’ll put this in your portfolio for you.”
James West: Interesting. So is the investment thesis behind this, capital appreciation? Or, as you said, that you actually pay out a dividend based on the fact that you lend out your basket of stocks on a regular basis?
Steve Hawkins: Yeah, we didn’t even know that was going to happen when we launched the product. So that’s completely ancillary benefit to owning the product. So right now, I mean, we launched it as a long-term growth prospect for individual investors who want access to the cannabis sector. You know, when I bought my original shares right near the start, you know, I bought it as a long-term play even though it went up 25 percent in the first week, and then there’s a lot of people saying ‘Oh, I just bought it at $10 in the IPO, I’m going to sell it at $12.50 a week later’. But, you know, the stock has appreciated up to, I think the high was around 26 and change, now it’s around $24. But you know, the fund itself was still the best-performing mutual fund in Canada in 2017 for that period, and on a year-over-year basis right now is the best-performing mutual fund in Canada
James West: So, what is the criteria for your investment into companies? I’ll start there – what is the criteria for investment into these companies? What disqualifies a company, what qualifies a company?
Steve Hawkins: So there’s a couple of different things. So one, so we have to create a universe. So this is an index ETF, so there’s not a lot of qualitative analysis that goes into the individual stocks that we pick for the portfolio. But the index determines what the universe is. So all new cannabis companies, especially if they’re production, cultivation, distribution, and channel, they’ll qualify in the universe. As long as they’re north – they have to be listed on a North American exchange, and that’s not over the counter. So that primarily means TSX, TSV-V, CSE, NEO…so if they’re in the universe of eligible companies, then it really becomes a purely quantitative decision of whether or not they go into our index or not, and that really is a minimum $75 million market cap, and then average daily trading volume of, I think, $250,000 over a 30-day period.
We also launched an ancillary ETF, which is a small-cap version of this, so it’s HMJR. So it’s Junior Marijuana, and we, for that, again, from a quantitative perspective, you have to have a market cap between $50 and $500 million, and then you have to have an average daily trading volume of a little bit less than what HMMJ’s is. I don’t know what the number is offhand.
But again, but the prospect there is, these are companies that will sort of benefit from takeover action, from additional capital markets action, for companies that, you know, they’ve developed a new technology from a production perspective or a refinement perspective, that maybe one of the bigger players wants. So, like, we’ve seen some, like ICC, we saw it taken out, right? And HMJR had a much larger percentage weight to ICC in it than HMMJ did, you know, because both of these indices are market-cap-weighted, and both of the portfolios are market-cap-weighted.
So HMMJ has a significant weight to Canopy, Aphria, Aurora, Cronos, Tilray, because of the large market capitalization of those, whereas JR really looks at the small to mid-cap companies, if you can call them that, from the marijuana industry, and then it heavily weights, again, from a market cap perspective, the smaller market cap companies.
James West: Interesting. And the ETF itself never goes short, itself?
Steve Hawkins: Absolutely, we cannot go short. You know, our job is to replicate an index, and so we just own the companies that are in the index, for the most part, and then we manage the portfolio in the weights according to similar to what the index is.
The one biggest issue, though, for HMMJ, is because we’re listed on the TSX, and the TSX has been very public but strict about the rules of the operations of those underlying companies. So if one of those companies in the index is carrying on, maybe it’s Canadian company, it’s carrying operations here in Canada, but it also has some ancillary operations going on in the US, it’s trying to produce or cultivate or distribute in one of the states, it’s carrying on actions here, that type of company is basically in violation of the Federal rules in the US, as we know, and the TSX has taken strict rules that they don’t want any of their companies listed on the TSX or TSX-V to be operating in the US.
So you have companies like Aphria, and I know you met Vic earlier; you know, they were carrying on operations in Florida, and I can’t remember the other state that they were in, but they had to spin off that business line to maintain their listing on the Toronto Stock Exchange, on the big board.
James West: Right.
Steve Hawkins: If they wanted to do something is, they could have moved their listing to NEO or CSE, which some companies have done, but you know, for us, if Aphria or Canopy specifically started growing in the US or distributing in the US, that would actually disqualify them from our portfolio. It would still be in the index. So, you know, we have to manage the portfolio very carefully for those things.
James West: Okay, well, that’s a great introduction to the whole ETF, and I’d like to say that we’re going to have you back as a regular guest, Steve, because you obviously know what you’re talking about. Thanks very much for joining us today.
Steve Hawkins: Thank you very much for having me.
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