New federal rules on marijuana failed to spark buying interest in cannabis ETFs despite strong performance in 2024. ETFs like Roundhill Cannabis ETF and Amplify U.S. Alternative Harvest ETF saw gains after the U.S. Justice Department announced plans to reclassify marijuana as a less dangerous drug. However, the gains did not lead to asset growth for many funds, indicating that investors are cautious about betting on the sector. Only two cannabis-focused ETFs have seen inflows since the announcement, suggesting that investors who already own specific stocks are driving the market.
Some analysts predict a potential shakeout in the cannabis ETF segment due to investor wariness. GlobalX Funds closed its GlobalX Cannabis ETF, which had been slow to accumulate significant assets. Analysts believe that if demand does not materialize in 2024, more closures could occur in the niche market. However, the ETFs could attract more money if the Justice Department’s proposal to reclassify cannabis attracts a new wave of investors to the industry.
Despite the strong performance of cannabis ETFs in 2024, investors remain hesitant to increase their exposure to the sector. The AdvisorShares MSOS 2x Daily ETF and AdvisorShares Pure US Cannabis ETF are the only funds that have seen inflows since the Justice Department’s announcement. It appears that existing cannabis-focused investors are driving the market, while broader ETF investors are holding back. The lack of significant asset growth for many of the funds indicates a level of caution among potential investors.
The closure of GlobalX Cannabis ETF suggests that there may be a shift in the cannabis ETF market in the near future. Some analysts warn of a potential shakeout in the segment, as funds that fail to attract sufficient demand may face closure. Todd Rosenbluth, head of research at Vetta Fi, notes that if demand does not increase in 2024, there could be additional closures in the cannabis ETF space. The niche offering in cannabis ETFs may be a crowded market, leading to closures of funds that struggle to accumulate assets.
While cannabis ETFs have performed well in 2024, broader ETF investors are hesitant to enter the market despite the potential for growth. The gains seen in ETFs tracking cannabis stocks following the Justice Department’s announcement have not translated into increased asset growth. Steve Sosnick, market strategist at Interactive Brokers, suggests that the market has been primarily driven by cannabis-focused investors who already have investments in specific stocks. The cautious approach of ETF investors may indicate a need for more significant developments in the sector to attract broader interest.
The potential reclassification of marijuana as a less dangerous drug by the Justice Department could be a catalyst for increased investor interest in cannabis ETFs. The proposal has the potential to attract a new wave of investors to the industry, leading to greater demand for ETFs tracking cannabis stocks. While there are concerns about potential closures of funds that fail to gain traction in the market, the reclassification of marijuana could spark renewed interest in the cannabis sector. Investors will be closely watching developments in the industry to determine the future growth potential of cannabis ETFs.