What's Ahead For Marijuana ETFs After A Dismal Show In 2019?

After a solid rally in 2018 attributable to legalization of recreational marijuana in Canada, the industry performed dismally in 2019 with the biggest marijuana fund ETFMG Alternative Harvest ETF (CSE:MJ) losing 35.3% (as of Dec 20, 2019). Earnings weakness,“longer-than-anticipated product rollouts and overly enthusiastic forward estimates” weighed on the space this year (read: After a Landmark 2018, Will Pot ETF See Same High in 2019?).

Third-quarter results of marijuana companies failed to impress investors. Guidance issued by the companies was also underwhelming. Cannabis companies like Aurora Cannabis (TSX:ACB) , HEXO (TSX:HEXO) , Cronos Group (NASDAQ:CRON) and CannTrust (NYSE:CTST) slashed production guidance for 2020. CannTrust faced regulatory issues for illicit cultivation in 2019 (read: Can Bill Hopes Relieve Earnings-Induced Pain in Pot ETFs?).

What Lies in 2020?

We have a moderate outlook on the space for the next year. While a downbeat 2019 corrects the industry’s valuation to some extent, there’s still uncertainty around the space. Regulatory backdrop holds the wild card for the industry’s well-being.

Most Democrats have recommended marijuana legalization in their campaign. However, Republicans are yet to give a green signal. Donald Trump has not given any clue about his preference on the legalization of marijuana but senior Republican leaders are not quite supportive of marijuana legalization unlike Democratic leaders, per Market Realist.

The total number of U.S. states greenlighting medical pot is now 33. There are 10 states that have approved the recreational use of marijuana. Illinois is expected to join the recreational group next year.

On a positive note, a U.S. congressional committee passed a legislation in late November to end the federal embargo on weed. But an approval by the full House and Senate should take time and will likely see many revisions in the process.

The latest bill proposes to enact a 5% federal sales tax on marijuana products that are manufactured in or imported into the United States and obliterate past criminal records. However, the bill may not be approved easily in the Republican-dominated Senate (read: Is REX Shares' Leveraged Cannabis ETN Launch Untimely?).

With the pressure mounting on the space, deals – one of the hot features of the industry in 2018 – reduced . A source said that the number of cannabis M&A deals in the four weeks ended Nov 22 dropped to three from 36 a year ago.

All is not gloomy in the space. Improving retail scenario in Canada or the legalization of Cannabis 2.0, or next-generation cannabis products should favor industry bigwigs like Canopy Growth (NYSE:CGC) . Canadian cannabis producers started shipping cannabis derivatives products from Dec 16. EY, a global professional services firm, estimates that 1.5 million new customers are likely to join the market thanks to the advent of cannabis-infused edibles, extracts and topicals as part of Cannabis 2.0.

ETFs in Focus

Against this backdrop, investors can keep a close tab on marijuana ETFs like AdvisorShares Pure Cannabis ETF (LON:YOLO) , Cambria Cannabis ETF TOKE, MJ, Amplify Seymour Cannabis ETF CNBS, Cannabis ETF THCX and Global X Cannabis ETF (BO:POTX) . It is too early to comment on the momentum of the industry. Regulatory backdrop, accessibility to funding and the extent of acceptance of Cannabis 2.0 will decide the course of the stocks next year though things are unlikely to be as grave as 2019.

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