May 29, 2019

Horizons ETFs Management (TSE:HMMJ) SVP on New 2x Daily Bull ETF (TSE:HMJU) & Inverse ETF (TSE:HMJI)

Midas Letter
Midas Letter
Horizons ETFs Management (TSE:HMMJ) SVP on New 2x Daily Bull ETF (TSE:HMJU) & Inverse ETF (TSE:HMJI)

Horizons ETFs Management (TSE:HMMJ) (OTCMKTS:HMLSF) SVP Mark Noble explains the benefits of the financial services company’s two new cannabis ETFs. Horizons’ BetaPro Marijuana Companies 2x Daily Bull ETF (TSE:HMJU) is a leveraged fund offering investors 2 times the exposure to the daily performance of the North American MOC Marijuana Index. The second new offering is BetaPro Marijuana Companies Inverse ETF (TSE:HMJI) and is an inverse fund offering investors minus 1 times exposure of the daily performance of the North American MOC Marijuana Index. Noble explains that these new ETFs allow retail investors to capture short term moves in the cannabis space while providing greater liquidity and limiting risk. In particular, he emphasizes that the Inverse ETF (TSE:HMJI) offers retail investors a chance to take short positions, which can be harder to access for individual retail investors.


Narrator: Introducing the world’s first marijuana-focused ETF: Horizons Marijuana Life Sciences Index ETF: HMMJ. Diversified exposure to companies in the rapidly growing cannabis industry. HMMJ offers easy access to a new frontier of investing.

Horizons ETFs.

[stock_chart symbol=”HMMJ:TSX” align=”left” range=”1Y”]

James West:   Mark Noble joins me now from Horizons ETF. Mark, welcome back.

Mark Noble:   Hey, great to be here.

James West:   Mark, what’s new with Horizons ETFs? You’ve launched another couple of new ones; one’s doubly leveraged to the upside, one single times leverage to the downside. How do those work?

Mark Noble:   Okay, so we’ve had a lot of demand from HMMJ users, holders, wanting to get exposure either on the leverage-long side, or in some ways, want to short it. So what we’ve done is, we’ve launched two new ETFs. One, HMJU, provides two times the exposure of an underlying North American marijuana index, and the marijuana index is sort of comprised of the large LPs, so all the, you know, the household names; not small caps.

And then we have a minus one index ETF which is ticker symbol HMJI. So you’ve got HMMJ right in the middle long exposure, HMJU, double exposure, and HMJI for inverse exposure. And that provides minus one times exposure to the market. So if that index goes up during the day 1 percent, the minus one would lose percent and the double one would make 2 percent. And the inverse would happen; if the index was to decline 1 percent, you would make 1 percent on the inverse and you would lose 2 percent on the double long.

James West:   Oh, okay. That’s relatively easy to understand; I could probably get it if you told me that about three more times.

Mark Noble:   [laughter]

James West:   But no, I get it. So does that make the – is, like, on the short side, for example, I’m familiar with the natural gas –

Mark Noble:   Right, very similar idea.

James West:   Yeah. The 3X to the downside can wipe you out in a heartbeat, and whereas, you know – on either one, you can really be, you can make an error in judgment and find yourself.

Mark Noble:   Right. We’re not doing three times, so it’s two times on the leveraged marijuana, the upside. There’s obviously a lot of volatility, so today, for example, we just launched them today; the market was up a certain amount, and I believe the double long was up, you know, twice that.

But if you look at the short side, that’s where we’ve had a lot of interest. The reason being is, you know, I’ve come on here before and talked – there’s a lot of tension between I would call Wall Street and Main Street, and the marijuana equity business, the bulwark of support for it is actually self-directed investors. It’s retail investors.

If we go and we look at Wall Street analysts’ reports, like hedge funds, there’s a lot of short interest on marijuana stocks, and in fact, the borrow costs on individual marijuana stocks are absolutely astronomical. They’re at their lows right now, oh, probably over the last six or seven months, but even a stock like Tilray is like 35 percent per annum to borrow. That means that if you held that short position for a year, you have to make 35 percent just to break even.

James West:   Right.

Mark Noble:   We’ve seen that go up to 100 percent at some points in time. Companies like Organigram, around 22 percent; you know, Canopy is probably the lowest at about 6 percent. Individual investors have a really hard time taking a short position on the market, because they can’t really, you know, they have to use margin. They can have a margin call.

So what this ETF allows you to do, particularly HMJI, is, it allows you to have a flexible way to short the market. Even if you’re long over the long term, there may be periods of dislocation, you want to trade; this allows you to take a short position intra-day, buy it throughout the day, and you can get that exposure. The one caveat, though, is unlike any other ETF in Canada, this has a borrow cost associated with it, because our counter-party, in order to provide short exposure, they’re going to actually have to short those stocks in their portfolio.

So the current borrow cost on this ETF is about 18 percent, and it could be as high as 30 percent. So again, back to your original point, these are something that you’ve got to be looking at from a tactical focus. So if you’re looking at your technicals and you have a high conviction that there’s a movement happening, you can use these ETFs to magnify your returns or take advantage of a pullback in the market. Just recognize that there’s quite a bit of a cost to that, are reflected in the borrow cost that gets transferred over.

James West:   So your upside is going to be whatever the move is, ex of 18 percent per annum?

Mark Noble:   So that’s a great question. No. So on the upside, there is no borrow cost, so it’s just two times what the index would be. However, there’s, you know, a leverage cost, a management fee of about 1.45 percent.

James West:   I mean, the upside in investing in the minus one.

Mark Noble:   Yes, sorry, yeah.

James West:   Okay. So I need, so if I’m looking for a intra-day move, let’s say that I have a little birdie whispered in my ear and I’m fully expecting Canopy to lose $5 in the next two days. So I’m going to put $100,000 down on the short inverse ETF, and I’m going to, my plan is to exit the position at the week no matter what happened, based on this expectation; unless my stop losses kick in and I get stopped out.

So does that mean that, even for two days or three days that I hold it, it’s going to be 18 percent for the entire trade?

Mark Noble:   No. It’s 18 percent per annum.

James West:   Okay. So it’s divided by…

Mark Noble:   So it would be divided by 252 trading days, right?

James West:   252, okay.

Mark Noble:   Well, generally that would be the math, but what I want to highlight here is, you know, if you have a view that Canopy is going to lose 5 percent over six months, you wouldn’t buy HMJI or the sector, because the roll costs of that particular short could really hurt you. But to your example, that’s exactly how we anticipate investors will try to use it, is tactically. I’ve had a view from, you know, three to four days, a week, maybe a daily – we provide exposure daily, so the investment objective is to provide daily exposure. But I have a view that one to three days that this move’s going to happen, I can get in and out of this position using the ETF to take advantage of that tactical move, and then I don’t have to set up a margin account, I don’t have to worry about borrow costs and prime brokerages. That’s all a one-stop solution for you to take a short position on the market.

On the other side, on the two times, the exact same thing. If you think that, you know, Canopy is going to shoot the lights out on its next earnings, and I know there seems to be a buildup of bullish activity on there, you know, you could take a two times position and try to capture an upside movement on the market going in for a three to four day period.

But the ETFs themselves, their goal is for that day. So for that day, they will deliver 2 times the underlying index; beyond that, the exposure resets so that you have it taking that resetted position and then providing two times. The reason we do that is so that we limit the investment exposure loss to what you invested. You’re never going to lose more than what you invested. Anyone who’s shorted marijuana stocks in the last year knows that you can lose a lot more than you invested, especially if you get caught with a margin call, that can take you out of the position entirely.

And the same thing with leverage: if I borrow, my borrow costs can exceed that. So there’s been a lot of excitement about these ETFs, because they’re taking that unlimited risk of going long or short out of the marketplace, and allowing you to have a liquid vehicle for which to get those movements.

James West:   So if you would have gone short Canopy on August 13, 2018, you would have had your ass handed to you, if you were actually short. But if you were in the inverse –

Mark Noble:   Double long.

James West:   If you were in the inverse, it would have reset and you would have been like, okay, it’s time to get the hell out of Dodge, but you wouldn’t have lost your shirt.

Mark Noble:   Correct.

James West:   Theoretically.

Mark Noble:   You’re exactly.

James West:   Okay, that’s interesting. So what are the, what are the disadvantages of investing in, like, the double long? I mean, like, it seems to me like it’s a zero-loss proposition. If you think that the stock market – if you think the index is going higher based on, like, a bunch of great earnings, then why wouldn’t you just load up the truck on that?

Mark Noble:   Because the underlying is volatile, right? So the reason that people like to trade marijuana stocks, like, when we look at HMMJ, we’re doing anywhere from 1 million to 5 million units a day. And a lot of that is actually short-term money coming in and out, and that’s because the volatility of marijuana stocks, I believe last year it was somewhere around 40 percent. Like, there was huge swings, right? If you remember going into August of last year, you know, there was that crescent; then we had the huge move-up, and then we had Q4, you lost another 40 percent, and then you’re up, you know, 80 percent on some of these stocks year-to-date.

So yes, using double leverage can allow you to capture those returns, but on the downside, if you’re 2 times leveraged on a big, 20 or 30 percent move on the underlying, well, now you’ve lost 40 to 60 percent.

James West:   Right.

Mark Noble:   So there’s no free lunch in investing, and so if you take a leveraged position, your returns are going to be magnified, but also, your risk is, as well.

James West:   Sure. So the, the, both the inverse 1X and the 2X are, the benchmark is the HMMJ itself?

Mark Noble:   It isn’t, technically. So it is a different index; it’s called the North American Market on Close Index.

James West:   Okay…

Mark Noble:   But for all intents and purposes, the exposure is essentially the same; so if you were to put them in there, you’ll see the performance of the index is very close to HMMJ. What we don’t have the HMMJ does, HMMJ has over 50 stocks, and there’s a lot of smaller-cap names in there, sort of in the, I would say, the $75 million to $500 million range. None of those smaller names are in this particular index; in order for us to have a derivatives-based structure, a synthetic structure to deliver leverage, we need to have liquid names.

So it’s a smaller portfolio of the larger names, but like I said, it’s the names you’re widely following. I mean, the biggest holdings are Aurora, Canopy, Tilray, Cronos….

James West:   Right.

Mark Noble:   Organigram.

James West:   So in these multiplier ETF strategies, is it important for the investor to understand exactly the total effect of the individual constituents likely in terms of the full market reaction to any given piece of news?

Mark Noble:   I mean, it’s important to understand that if you’re betting it on, you know, if you think Canopy is an outlier and Canopy is going to do one thing and the sector is going to do something else, then you have to keep that in mind. But generally what we’ve started to see is that the large names have what I call a high degree of beta to the underlying market. So a big movement in Canopy is going to create a net rising tide effect across the board.

James West:   Sure.

Mark Noble:   So generally, your technicals on most of the big Canadian LPs are going to suggest that things move in tandem. So to your question, you know, yes, you do need to be aware that if you’re looking at individual stock news, you want to be playing that individual stock; but understand that big news on an individual stock, particularly the big names, is going to probably impact the sector. So there will be a correlation, and we want to provide sector exposure, because if you go double long the sector and the sector is positive, but then you get a company, you know, failing on earnings miserably, which we’ve seen a couple of them do, you don’t want to be caught offside on a leveraged position on that one side.

So the diversification of going long the sector, actually reduces that single stock risk which provides even more volatility.

James West:   Yeah. Interesting. Well, I’m going to take a couple of schwacks at it, just because that’s how I learn. Learning the hard way, understanding through losing and/or winning.

Mark Noble:   Well, read the prospectus, and read a lot of the disclaimer language there. These are structurally complex. They do what they’re designed to do, but you know, an education goes a long way.

James West:   Okay. Mark Noble from Horizons ETFs, thank you very much for your input. As usual, very enlightening; just a little bit confusing this time.

Mark Noble:   A little bit confusing, okay.

James West:   Any other fool would be able to understand it, it’s just that I’m a particularly big fool. Thanks for joining me today, Mark.

Mark Noble:   My pleasure.


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