The Key Factors Pot ETF Investors Need To Keep An Eye On

Investors in the Horizons Medical Marijuana Life Sciences ETF (TSX:HMMJ) have certainly experienced turmoil of late, perhaps to a greater degree than most other investors and broader index tracking Exchange Traded Funds (ETFs). There are a few key reasons for this.

Perhaps the most obvious reason investors have been let down by the overall cannabis sector has to do with the reality that the entire sector is without fundamentals at this present time from which to base valuation metrics on.

The sector, as a whole, continues to bleed cash, as various cannabis producers build out production capacity, in the midst of what appears to be a very severe supply glut in the sector.

There currently exists in the marketplace more than two years’ worth of supply sitting in warehouses. This fact has become a cause for concern among investors and industry watchers, like myself. Supply/demand dislocations will be extremely detrimental to market pricing of wholesale cannabis, and therefore producer margins for their foreseeable future.

The average selling price per gram of cannabis and the associated gross and net margins generated by producers are the key factors pot ETF investors need to consider right now.

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The black market in markets with legalized weed continues to be strong due mainly to pricing and retail issues. These include branding (or lack thereof), product availability, rollout delays etc.

These issues do not seem to be abating in any way whatsoever right now. Until legal weed prices drop to meaningfully compete with black market product, I'd encourage investors to steer clear of this broad sector and the HMMJ ETF as well.

Invest wisely, my friends.