Cannabis ETFs rise following HHS advisory on marijuana

An employee of Aurora Deutschland GmbH, a manufacturer of medical cannabis products, inspects a flowering cannabis plant in a greenhouse in Leuna, Germany, on September 11, 2023.

Lisi Niesner | Reuters

Marijuana ETFs are surging in September as investors flock back to the sector after months of waning interest.

The fund’s surge, the strongest in recent years, follows the U.S. Department of Health and Human Services’ recommendation last month to ease restrictions on marijuana following a review of its classification under the Controlled Substances Act.

It marked a rapid turnaround for a quasi-legal industry constrained by the anemic pace of federal reform. The increase caps several quarters of slow growth and even losses for some funds.

ETFMG Alternative Harvest (MJ) And AdvisorShares Pure US Cannabis (MSOS)Notably, they are far outperforming the Dow Jones Industrial Average and the S&P 500 this quarter, according to Tuesday afternoon. MJ and MSOS are up about 47% and 56%, respectively. The Dow and S&P were both up slightly, up about 0.5%.

“This is effectively a continuation of what is the most essential element to trading these stocks, which is federal catalysts,” said Matt Bottomley, an analyst at Canaccord Genuity. “The speed is much faster with these federal headlines.”

Last month’s announcement also sent shares of several cannabis companies higher, including Canopy Growth, Tilray Brands and Cronos Group.

Marijuana stocks have suffered in recent years as many investors pulled out of the industry, leading to a capital shortage. Although 39 states have legalized marijuana for recreational or medical use, the sector has struggled as Schedule I classification and federal prohibition limit access to financing and a broader market.

AdvisorShares, the largest cannabis fund manager, suffered the closure of its Poseidon Dynamic Cannabis ETF last month. The fund’s last trading day was August 25th. On September 1, he liquidated assets and paid out his shareholders.

At the time of the closure announcement, the fund’s co-founder, Morgan Paxhia, told CNBC that it was not “immune to the broader macroeconomic environment and, in particular, the dramatic shift in investor sentiment that has impacted the cannabis industry.”

Federal reform is just around the corner

The HHS recommendation, made at the direction of the Biden administration and addressed in a letter to the Drug Enforcement Agency, has signaled to stakeholders that broader federal reform could be on the horizon.

Possible changes include the Secure and Fair Enforcement Banking Act (SAFE), a congressional bill that will allow banks to provide services to legal marijuana businesses. Substances under the Controlled Substances Act pose a risk to banking institutions, while federal law remains unchanged.

“Every time legislation like the Safe Banking Act has been introduced, we have seen a corresponding increase in investor interest,” said Sundie Seefried, CEO of Safe Harbor Financial, a digital-focused commercial banking institution. “This milestone could be a game-changer and provide the much-needed stability in the regulatory environment that investors have long been looking for.”

SAFE Banking is making its way through Congress, with a vote in the Senate Banking Committee expected soon. Meanwhile, the DEA has begun reviewing the classification of marijuana and will submit a proposal to the attorney general, who will have the final say on the reclassification.

Bottomley said it’s becoming “more and more likely as these processes go on that institutional capital that wouldn’t otherwise be invested in the space will come into the space,” but whether the momentum continues “really depends, we’ll hear.” Next time from the DEA?”

“If there is radio silence in the fall and then January, I wouldn’t be surprised to see the sector trend sideways,” Bottomley added.

—CNBC’s Christopher Hayes contributed to this report. Cannabis ETFs rise following HHS advisory on marijuana

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