Medical Cannabis Monthly Report | March

• With the Democrats in the driving seat, legislative leaders have made clear that cannabis reform will be a priority item for 2021        
• The total addressable market for the US continues to increase as additional states adopt cannabis reform        
• In the quarterly rebalance, the fund added 14 securities to bring the total number of securities held to 34. The new additions included seven companies operating in the ancillary services sector, three securities in each of the medical and pharmaceutical sectors, and one single holding in the CBD Wellness sector

CBDX Performance

Past performance is no guarantee of future performance. Source: Bloomberg, HANetf *12 Month figures based on 29.02.20-28.02.21

Performance Review

After a strong start to the year, growth equities pulled back in the last week of February as macro factors dominated the market narrative. Concerns about valuations of high growth companies were front and centre with the sharp move in the US treasury yield curve.[1] The market is now left pondering the impact of coming inflation and whether the Federal Reserve will change its outlook. Even though cannabis stocks have enjoyed great price appreciation in the past 12 months, there is still ample opportunity for earnings growth deriving from the cannabis vertical based on fundamental and jurisdictional factors. Past performance is no guarantee of future performance.

Within the universe of our medical cannabis ETF, performance was strong across all sub categories and previously lagging names outperformed as the market solidified confidence in the future of cannabis. Medical cannabis names, which had lagged last year, outperformed significantly in February on multiple appreciation. The pharmaceutical cannabinoids sector performed well on the back of the recent acquisition of GW Pharmaceuticals. Ancillary services continue to perform well as the US cannabis sector takes off with healthy growth. At the end of February, the fund rebalanced to add 14 additional securities to bring the total for the ETF to 34 securities.

Past performance is no guarantee of future performance. Source of all data: Purpose Investments.

The Medical Cannabis and Wellness UCITS ETF Performance Table

As of 28.02.2021

Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Bloomberg / HANetf. Data as of 28/02/21

Industry News

With the Democrats in the driving seat, legislative leaders have made clear that cannabis reform will be a priority item for 2021. This includes significant changes to cannabis’ drug classification and the sector’s access to capital markets. The Democrats frame this as an exercise of overturning the injustices of the ‘war on drugs’ and its impact on minority communities. However, it’s quite easy to gain momentum for a legislative action expected to add hundreds of thousands of jobs to a struggling job market[2] and billions of dollars to extended federal coffers.

Mexico published rules to regulate medical cannabis, setting up for a federally legal industry and taking another step towards cannabis reform. The new law allows pharmaceutical companies within the country to officially research cannabis for medicinal purposes.[3] Additionally, it also allows for testing of cannabis for adult-use purposes. Pharmaceuticals have long found road-blocks to carry out comprehensive research and this is another step in the right direction.

The French Government continues on its steps towards a medical cannabis pilot program by finalizing six producers to provide medical cannabis to the program. These include firms from Australia, Israel, UK and Canada.[4] The program is expected to start in March for 3000 patients and will last two years.

The London Stock Exchange (LSE) successfully listed two medical cannabis and CBD wellness businesses in February bringing the first such exposure to market for a senior European exchange. Australian medical cannabis company, MGC Pharmaceuticals launched their dual list in February as did Israeli medical cannabis firm Kanabo Group. These listings further fortify the emergence of cannabis as a viable sector for long term investment mandates.

In late February, the Commonwealth of Virginia legalized adult-use cannabis providing more liberalized cannabis access for another 8.5million people in the United States.[5] The total addressable market for the US continues to increase as additional states adopt cannabis reform. This has a positive impact on the ancillary services sector which help in the infrastructure development and maintenance of cannabis reform. Additionally, CBD wellness sector benefits by finding additional distribution infrastructure.

Germany imported a record amount of cannabis in 2020, with the industry growing 37% annually from the year before.[6] The German market continues to evolve as supply chains become more robust and Germany seeks to increase cannabis trading partnerships outside of the historical dominance of Netherlands and Canada.

Recent research report from BDSA indicates that cannabis markets outside the US and Canada exceeded the US$1B sales mark in 2020 for the first time. The firm expects International sales to top $8.3B in 2026 with a CAGR of 40% for the next five years. The bulk of that new legal spending will be driven by Mexico (104% CAGR) and Germany (36% CAGR), though the U.K. (57% CAGR) and France will contribute significantly (186% CAGR).[7]

Constituent News

In the quarterly rebalance, the fund added 14 securities to bring the total number of securities held to 34. The new additions included seven companies operating in the ancillary services sector, three securities in each of the medical and pharmaceutical sectors, and one single holding in the CBD Wellness sector. Roughly half the securities are new public businesses with new listings, and the other half were included as price appreciation led to meeting the fund’s minimum market cap requirement.

Ancillary Services: added the recent IPOs of Agrify Corp and Hydrofarm in the United States. Both businesses are involved in development infrastructure for the US cannabis industry. Additionally, the marketing and e-commerce company WeedMaps has turned public through a SPAC transaction with the name Silver Spike.

Medical Cannabis and Pharmaceutical Cannabinoids: many names in these two sectors were added on the recent performance and market cap appreciation of the securities. The recent GW Pharmaceutical acquisition shed light on the undervalued assets in these two categories.

CBD Wellness: Hempfusion is a wellness business established in the U.S. with a growing international presence. The company has a variety of CBD brands and wide distribution throughout the country. The company also has plans to sell products across Europe and Emerging markets such as China, Mexico and India.

Outlook

In the near term, capital markets are trying to decipher the signals of the bonds market, which has investors on edge. Volatility remains elevated but it’s important to keep the big picture in mind when it comes to the story of cannabis proliferation. One part of this industry is selling a non-cyclical consumer product with proven demand, where growth is secular and not relative. Other parts of this industry are trying to establish new product forms through a multi-channel approach, and these products have displayed many qualities which are moving with consumer trends and not against. The industry has recently gone through a phase of balance sheet strengthening, and now the near-term reforms are providing an opportunity to prove the efficiency of business models. We expect the next six to twelve months to be crucial in developing the long-term growth rates of the industry.

Product Details

The Medical Cannabis and Wellness UCITS ETF, is a UCITS compliant Medical Cannabis ETF domiciled in Ireland.

The fund tracks a rules-based Medical Cannabis and Wellness Equity Index from Solactive, consisting of publicly listed companies conducting legal business activities across nine thematic sub-sectors in the medical cannabis, hemp and CBD industries.

The fund seeks to provide targeted exposure to the rapidly expanding legal medical cannabis industry that is set for further growth as more countries legalise cannabis for medical use.

Please remember that the value of your investment may go down as well as up and past performance is no indication of future performance.

Visit the Cannabis ETF Fund Page for more information.