Cannabis ETFs Soar Following HHS Recommendation to Reschedule Marijuana: A Game-Changing Opportunity

Marijuana-related exchange-traded funds (ETFs) are experiencing a surge of interest in September. Investors are once again flocking to the sector after months of decreased enthusiasm.

This recent upswing in ETFs is the most significant seen in recent years. It can be attributed to the recommendation made by the U.S. Department of Health and Human Services last month. The recommendation called for the easing of restrictions on marijuana after a review of its classification under the Controlled Substances Act.

This swift turnaround signifies a positive shift for an industry that had been hindered by slow federal reform. It also marks the end of several quarters of sluggish growth and even losses for some funds.

The ETFMG Alternative Harvest (MJ) and AdvisorShares Pure US Cannabis (MSOS) are two funds that are outperforming the Dow and S&P so far this quarter. MJ is up approximately 47%, while MSOS is up about 56%. In comparison, the Dow and S&P are both up around 0.5%.

“This is effectively a continuation of what’s the most significant factor influencing the way these stocks trade, which are federal catalysts,” said Canaccord Genuity analyst Matt Bottomley. “These federal headlines generate much higher velocity.”

Last month’s announcement also led to an increase in the stock prices of several cannabis companies, including Canopy Growth, Tilray Brands, and Cronos Group.

Despite the legalization of marijuana for recreational or medical use in 39 states, marijuana equities have struggled due to the Schedule I classification and federal prohibition. These factors have limited financing opportunities and access to a broader market.

AdvisorShares, the largest cannabis fund manager, recently closed its Poseidon Dynamic Cannabis ETF. The fund liquidated its assets and paid out its shareholders on September 1.

Co-founder Morgan Paxhia explained that the closure was influenced by the macro-economic environment and the significant shift in investor sentiment impacting the cannabis industry.

The recommendation by the HHS, made at the direction of the Biden administration, has sparked anticipation of more comprehensive federal reform in the near future.

Potential changes include the Secure and Fair Enforcement Banking Act (SAFE). This Congressional bill aims to enable banks to provide services to legal marijuana businesses. Currently, banking institutions face risks when dealing with substances under the Controlled Substances Act due to unchanged federal laws.

“Each time legislation like the Safe Banking Act has been presented, we’ve seen a corresponding increase in investor interest,” said Sundie Seefried, the CEO of Safe Harbor Financial, a digital-first commercial banking institution. “This milestone could be a turning point and provide the much-needed stability in the regulatory environment that investors have long desired.”

The SAFE Banking Act is currently progressing through Congress, and a Senate Banking Committee vote is expected soon. Meanwhile, the DEA is reviewing the classification of marijuana and will submit a proposal to the attorney general, who has the final say on reclassification.

Bottomley predicts that as these processes unfold, it will become more likely for institutional capital to flow into the sector. However, he emphasizes that the momentum will depend on whether the DEA provides updates in a timely manner. If there is radio silence until the fall or even January, he wouldn’t be surprised if the sector experiences a period of stagnation.

— CNBC’s Christopher Hayes contributed to this report