(Bloomberg) -- The top performing exchange-traded funds so far in 2021 have at least one thing in common: They all track the pot industry.
The Global X Cannabis ETF (POTX), the Cannabis ETF (THCX) and Amplify Seymour Cannabis ETF (CNBS) -- have returned more than 90% year-to-date, according to data compiled by Bloomberg. Those three non-leveraged products have largely outpaced the 4% gain in the S&P 500 Index.
That outperformance of those funds in the $5.8 trillion ETF industry highlights how hopes for legalization on both the state and federal levels are boosting the cannabis market and unleashing a wave of mergers and acquisitions. Most recently, New York Governor Andrew Cuomo proposed to legalize marijuana in his state, while a Democratic majority in Congress is fueling optimism of more widespread approval measures.
Such legislation “could legitimatize it and spur demand for marijuana, which would make companies that were suppliers more profitable,” said Todd Rosenbluth, director of ETF research for CFRA Research.
Besides a more accommodative political climate toward the group, cannabis stocks are surging on expectations for profit growth as well as a pickup in mergers and acquisitions, according to Kenneth Shea, an analyst at Bloomberg Intelligence.
Canopy Growth (NASDAQ:CGC) Corp. -- a producer of medical marijuana -- jumped 5% at 10:28 a.m. in New York after reporting revenue that beat the average analyst estimate. Other pot stocks and ETFs also surged on Tuesday.
The POTX fund climbed 11%, extending this year’s surge to almost 130%. Its largest holdings Tilray (NASDAQ:TLRY) Inc. and Aphria (NASDAQ:APHA) Inc. -- which agreed to a merger of $3.8 billion in December -- have skyrocketed in 2021, thanks in part to crowds on Reddit and internet forums piling in.
Those companies are also the two biggest stakes in the $1.95 billion ETFMG Alternative Harvest ETF (MJ), currently in fourth place among non-leveraged ETFs. It’s surged more than 90% this year and has taken in about $200 million, already more than half of its entire 2020 inflows.
Still, the performance of cannabis ETFs is notoriously volatile. While the funds rallied in 2018 after Canada and California deregulated production, a combination of disappointing earnings reports, stalling legalization efforts and difficulties in developing the right mix of products hurt returns.
“It seems like the cannabis space is a whirlwind: You can have some great return periods and others that are more challenging,” said David Perlman, an ETF strategist at UBS Global Wealth Management. “It’s one where you have to expect volatility, and you really have to look at the ETF to make sure you’re getting the names that you want.”
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