What Are Cannabis ETFs and How Do They Work?

Cannabis exchange-traded funds (ETFs) offer investors a way to gain diversified exposure to the cannabis industry without picking individual stocks. These funds hold baskets of cannabis-related companies and trade on major exchanges like NYSE Arca, making them accessible through any standard brokerage account.

The most popular cannabis ETFs include MSOS (AdvisorShares Pure US Cannabis ETF), which focuses on US multi-state operators through total return swap agreements since the fund cannot directly hold shares of companies engaged in federally illegal activities. THCX (Roundhill Cannabis ETF) provides broad cannabis exposure, while MJ (Amplify Alternative Harvest ETF) was one of the first cannabis ETFs and holds a mix of US and international cannabis companies along with tobacco and pharmaceutical stocks.

Cannabis ETFs use different structures to navigate regulatory constraints. MSOS, for example, uses swap agreements with counterparty banks to gain economic exposure to US MSO stocks without directly owning the shares. This structure allows the ETF to list on NYSE Arca while providing returns tied to companies that trade on OTC Markets. Other ETFs may hold Canadian LPs and ancillary companies directly since those businesses are federally legal in their home jurisdictions.

Key factors to evaluate when choosing a cannabis ETF include the expense ratio (cannabis ETFs typically charge 0.50-0.80% annually, higher than broad market ETFs), the underlying holdings and their weightings, tracking methodology, assets under management (which affects liquidity and bid-ask spreads), and whether the fund focuses on US operators, Canadian companies, or a global mix. Some ETFs are heavily concentrated in a few names, which reduces the diversification benefit.

Cannabis ETFs are generally considered lower-risk than individual cannabis stocks because they spread exposure across multiple companies, reducing the impact of any single company's poor performance. However, they still carry the sector-wide risks of regulatory uncertainty, and most cannabis ETFs have experienced significant drawdowns alongside the broader sector. They are best suited for investors who want cannabis exposure without the research burden of selecting individual companies.