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Along with the successes of cannabis companies such as GreenStar Biosciences Corp. (CSE: GSTR), there is a demand for more industry specific ETFs.

The legal marijuana market has triggered a real revolution, and companies have sprung up everywhere to capitalise on cannabis fever. The markets in Canada and parts of the US are open and cannabis companies can sell their goods. Investors and companies are looking to capitalize on renewed interest.

One such company is GreenStar Biosciences Corp. (CSE: GSTR) that trades in Canada and capitalizes on the success of their partner company Cowlitz County Cannabis Cultivation Inc. Cowlitz is a Washington State-based licensed producer of high quality cannabis products at affordable prices. They are generating revenue of $3 million per quarter which is continuously growing. At the end of 2018 Cowlitz recorded revenue of $14.6 million which is a tremendous increase from $600,000 in just five years of operations.

Despite the popularity of cannabis stocks, there is surprisingly little choice for investors who prefer blending – the kind of blending that exchange-traded funds offer. Most investor money went early to the ETFMG Alternative Harvest ETF (WKN:972339), which recently broke the USD 1 billion barrier. Given the enormous returns that cannabis stocks have generated so far in 2019, this should change soon – and fund managers want to remove a major obstacle that poses a challenge to new and “pure” cannabis ETFs.

Who is involved in the cannabis hype?

Several fund companies have already tried to launch ETFs that follow the cannabis industry. Last November, Innovation Shares applied to offer the Innovation Shares Cannabis ETF. It should focus on an index of Canadian and US companies involved in either legal marijuana or similar products such as hemp or cannabis derived oils. The minimum market capitalisation for cannabis stocks in the ETF would be USD 100 million and the weighting would be by market capitalisation but with a maximum allocation of 7%.

Then, at the end of January, AdvisorShares added with its own application. The ETF management company created the Pure Cannabis ETF AdvisorShares. The investment objective for the AdvisorShares fund would be similar to other pure cannabis ETFs, with at least 80% of assets invested in companies that generate at least half their turnover from marijuana or hemp or are registered with the U.S. Drug Enforcement Agency to develop marijuana, cannabis or related products for research and development purposes. The Fund would be actively involved in the selection of cannabis stocks.

Earlier this month, Amplify ETFs submitted its Amplify Seymour Alternative Plant Economy ETF. The fund seeks active management, with companies falling into one of three categories. The first includes cannabis and hemp plant specialists, including growers and growers as well as pharmaceutical and biotech companies. The ETF would also include companies in secondary sectors such as agriculture, real estate and commercial services. Finally, suppliers could also be included if they are active in areas such as the production of consumer goods and mechanisms, the provision of investment and financial services to the industry.

The problem for marijuana ETFs

Given the popularity of Alternative Harvest, all this could seem child’s play for new marijuana ETFs. But the big problem facing potential ETF providers is finding a financial institution that would be willing to act as a custodian bank for the cannabis investments. US federal banking laws create risks for financial institutions engaged in illegal drug trafficking, and since cannabis is still illegal at the US federal level, banks have preferred to keep their hands off it.

Recently, however, there have been developments that promise to reduce these risks. There has been a change in leadership in the US Department of Justice, and the new department head is willing to look at federal law regarding cannabis more loosely.

However, the issue remains controversial. Alternative Harvest once had a similar problem and initially had U.S. Bancorp (WKN:917523) as custodian, administrator and transfer partner. But last September the fund switched to Wedbush Securities and transferred other responsibilities to specialised institutions. It is likely that future marijuana ETFs will follow a similar path and try to use institutions that are not traditional banks but can still act as custodians under the rules of the U.S. Securities and Exchange Commission.

New Cannabis ETFs in Focus

Fund companies want to take advantage of every new investment trend, and that is also the driving force behind cannabis ETFs. Challenges remain, but these and other new funds in the cannabis industry are likely to go through the SEC approval process. Then it will be important to know the differences between the marijuana ETFs and decide which one offers the best long-term opportunity.