Cannabis ETFs snuffed out in Europe

Product closures and mergers from Rize ETF and HANetf mean Europe will soon be without a cannabis ETF, a further sign of consolidation within the thematic space.

Europe’s last-standing strategy targeting the divisive sector, the $13.9m Rize Medical Cannabis and Life Sciences UCITS ETF (FLWR), will mark its final day of trading on 12 December as new parent company Ark Invest looks to streamline the Rize ETF range.

Having been part of Rize ETF’s debut duo of products launched in February 2020, FLWR played a key role in driving the ETF issuer’s assets under management (AUM) to more than $100m within a year after gathering $44m assets in 12 months.

After Cathie Wood’s ARK acquired Rize ETF for £5.25m in September, the firm said it was in the “best interests of investors” to shut FLWR and three other ETFs whose assets had remained below $50m for 30 consecutive days.

The move comes within two months of HANetf announcing it would merge its “no longer viable” $10m Medical Cannabis and Wellness UCITS ETF (CBDX) into the $9m HAN-GINS Indxx Healthcare Megatrend Equal-Weight UCITS ETF (WELL) “on or after” 29 September.

The white-label ETF issuer said a challenging backdrop for the cannabis industry has seen CBDX’s underlying index shrink as some pure play companies became too small to be deemed liquid while others delisted entirely.

“Over the past two years, the medical cannabis sector has experienced increased compression and a narrowing universe, exacerbated by unfavourable market conditions,” HANetf said in a statement. 

“These developments have been reflected in investor sentiment and led to CBDX no longer being viable.” 

HANetf said the ETF’s AUM fell “significantly” over the past two years, from a high of more than $54m, and it did not expect this trend to reverse “in the short to medium term”. 

The collapse in demand for the ETFs is partially a symptom of the idiosyncratic risks inherent within listed cannabis equities. At the start of US President Joe Biden’s term in office, policy tailwinds had the opposite effect, with both ETFs boasting more than 40% returns within a year.

However, their demise is also emblematic of the broader pressure facing long-duration thematic baskets comprised of companies borrowing money to fund new projects and R&D, with interest rate hikes increasing their cost of capital and discounting expected future cashflows.

Outside of undersized cannabis ETFs, this trend is also impacting Europe’s largest thematic strategies including the $3.7bn iShares Global Clean Energy UCITS ETF (INRG), which sits near its lowest price since July 2020.

This same pressure has driven down returns and demand for thematic ETFs, which led AssetCo to mark down its valuation of Rize ETF before selling the business to ARK.

It also goes some way to explaining why HANetf has closed six ETFs and merged two ETFs into other strategies in its range since the Federal Reserve started hiking rates last year.

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