Cannabis investments mellow as Congress tarries on decriminalization

As the calendar rolls around again to April 20 — the inside-joke holiday for marijuana enthusiasts because of the date’s similarity to Section 420 of the penal code related to illegal drug use — the investing side of the business has little to celebrate.

Exchange-traded funds launched over the past few years to ride a wave of state-level cannabis decriminalization have been deep in the red for more than a year, despite what many believed would be a move toward relaxed federal laws under the Biden administration.

“The interest in cannabis ETFs accelerated in January 2021 with the Biden election and the likelihood of Democratic control of Congress as investors were optimistic that legislation to decriminalize marijuana,” said Todd Rosenbluth, head of research at ETF Trends.

Funds with clever ticker symbols including POTX, TOKE and YOLO all underperformed badly in 2021 and are all down from 15% to more than 30% so far this year.

The biggest ETF in the space, the $884 million AdvisorShares Pure US Cannabis ETF (MSOS), is down 30.7% this year, following a 29.9% decline last year.

The second biggest cannabis ETF, the $628 million ETFMG Alternative Harvest ETF (MJ), is down 19.3% this year, following a 21.7% drop last year.

While it might be easy to write the category off as a far-fetched effort supported by people who aren't spending their money on ETFs, those closest to the industry insist investors are missing the market.

“Fundamentals at the micro level have been strong and companies are becoming cash flow positive, and even at the macro level the news is good because the market continues to get bigger,” said Jason Wilson, cannabis banking and research expert at ETF Managers Group.

The disconnect, Wilson said, is that the funds offering exposure to the cannabis market are “trading on the political news.”

While 18 states and Washington, D.C., have legalized marijuana for recreational use, and 36 states have legalized it for medical use, marijuana is still listed as an illegal controlled substance at the federal level.

Nawan Butt, a portfolio manager at Purpose Investments, is focused on expanded demand for and access to marijuana both nationally and internationally, including looming legalization in New Jersey, New York, Virginia and Florida.

“The total addressable market for cannabis is increasing, but all the valuations are attached to one data point, the expectation of federal reform,” he said. “The growth and progress in decriminalization at the state level have been completely discounted by investors.”

In addition to signs of support for federal reform from President Joe Biden during the 2020 campaign, Butt said Sen. Chuck Schumer, D-N.Y., gave the industry hope in February 2021 by announcing plans for reform of the federal law.

“Legislation moves at a slower pace,” Butt said, citing the Marijuana Opportunity Reinvestment and Expungement Act of 2021, which broadly decriminalizes marijuana. It has passed the House five times, but has yet to face a vote in the Senate.

The SAFE Banking Act of 2019, legislation enabling financial institutions to provide services to legal cannabis businesses, has passed the House twice but has not seen a vote in the Senate despite bipartisan support.

Wilson places much of the blame for the lack of movement toward federal reform on Schumer.

“Everyone is waiting for Chuck Schumer to bring a bill that would push reform forward, but the problem is the first draft went way too far to get support from even moderate Democrats,” Wilson said, citing as an example a proposed 25% excise tax on cannabis.

“That kind of tax would kill the industry, and that’s why this whole thing is stuck in the mud,” he said. “When you have high taxes, it’s really hard for the legal operators to compete with the illicit operators.”

Wilson said the support for decriminalization at the federal level is bipartisan and includes nine Republican senators who sponsored the SAFE Act.

Another example of support from the more conservative party is Rep. Nancy Mace, R-S.C., who introduced a bill in November to decriminalize marijuana at the federal level, leaving the states to set their own laws related to use and distribution, similar to laws around alcohol use.

“That’s an example of a Republican-sponsored bill that has support from both sides of the isle,” Wilson said. “It’s not an issue of partisanship anymore, it’s become ideological.”

According to Wilson, Schumer is making the mistake of letting perfect become the enemy of the good by blocking federal marijuana reform that might not also right wrongs of the past related to diversity and fairness.

“What Schumer doesn’t want is a bill that just puts more money into the hands of people who are already well off,” Wilson said. “He doesn’t want cannabis to continue the injustices.”

At this point, as another April 20 passes without federal decriminalization to celebrate, the cannabis industry might now be banking on Republicans taking over control of Congress as the surest path toward federal reform.

“Some would say if we actually had a flip in the control of Congress, it could be a positive for cannabis, because we do have Republican support out there,” Wilson said. “But if we keep Schumer in charge of the Senate, we’d still have the problem because the bills passed by House would be more moderate.”