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HMMJ – October 2017 Update

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BY: STEVE HAWKINS, PRESIDENT AND CEO, HORIZONS ETFS

September 2017 Rebalance:

The Horizons Marijuana Life Sciences Index ETF (“HMMJ”) completed its quarterly rebalance in September. The holdings of the ETF are very similar to those after its June rebalance, with the major exception being the addition of MedReleaf (“LEAF”). LEAF was a major IPO back in June and was not eligible for inclusion at that time as it didn’t have sufficient trading history.

Below are the rebalanced index weightings of the North American Marijuana Index (“the Index”), as at September 15, 2017. (HMMJ seeks to replicate, to the extent possible, the performance of the Index.) Rebalancing of the Index, and by extension HMMJ, occurs before the third Friday at the end of each calendar quarter. At that point, all stocks eligible for inclusion in the Index are weighted by their respective market capitalization. However, no single stock can exceed 10% of the weight of the Index at the rebalance date.

As was the case after the June rebalance, the weightings of the stocks in HMMJ’s portfolio are not in exact proportion to the weightings of the Index. And, in some cases, there are certain stocks that are in the Index but not in the ETF, and vice-versa.

HMMJ does engage in a process known as “stratified sampling” to help it more efficiently replicate the Index. This means HMMJ can hold securities that may or may not be in the Index, and/or at potentially different weights than the Index. For example, HMMJ may hold certain names to enhance the ETF’s liquidity and/or reduce its turnover. This sampling is not used for active or discretionary management to enhance the performance of the ETF. HMMJ is a passively-managed ETF and has no opinion on the fundamental valuations or future prospects of any of the stocks in its portfolio.

North American Marijuana Index Weightings, as at September 15, 2017.

Name % Weight 
APHRIA INC. 10.00%
AURORA CANNABIS INC. 10.00%
CANOPY GROWTH CORP. 10.00%
GW PHARMACEUTICALS – ADR  10.00%
INSYS THERAPEUTICS INC. 10.00%
MEDRELEAF CORP. 10.00%
SCOTTS MIRACLE-GRO CO.  10.00%
CRONOS GROUP INC. 4.66%
22ND CENTURY GROUP INC.  4.22%
LIBERTY HEALTH SCIENCES INC. 3.38%
ORGANIGRAM HOLDINGS INC. 3.31%
SUPREME PHARMACEUTICALS INC. 3.27%
CANNIMED THERAPEUTICS INC. 2.94%
EMBLEM CORP. 1.71%
ZYNERBA PHARMACEUTICALS INC. 1.51%
INVICTUS MD STRATEGIES CORP. 1.29%
MARICANN GROUP INC. 1.28%
ABCANN GLOBAL CORP. 1.23%
MARAPHARM VENTURES INC. 1.19%

 

Source: Horizons ETFs Management (Canada) Inc.

HMMJ Pays Its First Distribution

On September 28, 2017, HMMJ paid out its very first income distribution of approximately $0.22¹ to its unitholders. Click here for details on this distribution.

HMMJ generated this yield through securities lending. Securities lending is a common practise with mutual funds and ETFs. In fact, one of the reasons that many large ETFs can charge low management fees is because they can offset many of their operating costs by lending out up to half of their underlying securities and earn additional income.

Cannabis related stocks generally tend to have slightly higher volatility than the broader equity market, which means there are typically more investors interested in going both long and short on the securities included in the North American Marijuana Index – the Index which HMMJ seeks to replicate.

Due to a number of factors that include (but are not limited to) volatility and the amount of free-market float and available lenders, many of the stocks in HMMJ can be lent out at higher-than-average lending rates compared to what is available for traditional large-cap equities.

Marijuana Stocks Are On Tear!

Due to the large amount of securities-lending revenue that HMMJ generates, it has handily outperformed the North American Marijuana Index. More importantly, marijuana stocks, particularly marijuana growers, have staged an impressive comeback in their valuations.

In June, the selloff in marijuana stocks was largely news-related. Valuations were high and there was no way to quantify where the industry was headed without guidance from the provinces on their plan to distribute recreational marijuana once it is fully legalized in July of 2018.

The recent announcement by the Ontario government (as well as other provincial governments, including New Brunswick and Alberta) on how they would sell marijuana gave investors clarity.

At a recent marijuana industry conference hosted by Blake’s law firm in Toronto (where I was keynote panelist), there was an entire segment on investing in marijuana. What really interested the analyst and investor community (in the opportunity in recreational marijuana) was the order size and price estimates by the provinces.

1) Demand

New Brunswick commissioned a crown study which estimates that the Canadian demand for a marijuana market is at least 400 metric tons! That’s well-above the current supply capacity of Canadian growers. There’s more than enough demand to meet supply, and if anything, the Canadian market is looking at a supply shortage of existing product once recreational sales go online.

2) Pricing

Another contributing factor pushing the stock values was the disclosure of retail and wholesale costs of marijuana. Canadian governments need to price legal marijuana at a rate that is competitively reasonable. Otherwise, there is a risk that a sizable population will continue purchasing illegally produced marijuana. That price is estimated to be about $9 per gram. It appears that government vendors are going to try to meet that type of pricing. In addition, the Federal government announced today that they are likely only going to tax marijuana sales at about 10%, which means there’s still margin for producers to make a profit.

The wholesale cost of marijuana will probably need to be about $5 per gram in order for the government to charge a retail price of around $9 per gram. This leaves ample margin for producers like Aphria, which reputedly can now cultivate their marijuana for about $1.11 per gram. Most of the big producers are around $2 per gram.

For the first time, investors have a sense of the revenue that some of these bigger marijuana producers might be able to generate from recreational marijuana. This is driving investor interest.

More on the Federal Government’s announcement and its impact on marijuana stocks can be read here:

https://beta.theglobeandmail.com/globe-investor/inside-the-market/pot-stocks-surge-on-federal-plan-for-marijuana-tax/article36481191/

3) Foreign Distribution

A number of Canadian producers are actively working to get involved in the German medical marijuana market, which was legalized in March of 2017. This is an 82 million-person market. The medical market in Germany alone could be bigger than Canada’s total marijuana market, as the country’s population is more than double Canada’s and medical marijuana is fully covered by insurance plans.

Many of the big Canadian producers are active investors in this market, lending their expertise and pool of funding to build subsidiaries in the German market. The estimated cost per gram in Germany is about €12-15!

These three tailwinds are really driving optimism for marijuana stocks and we could potentially see HMMJ move quite a bit higher in the coming weeks.

¹ The units of Horizons Marijuana Life Sciences Index ETF began trading on April 4, 2017. The distributions attributable to those units have been pro-rated from its launch date. Distributions for the Horizons Marijuana Life Sciences Index ETF are declared and paid in Canadian dollars, including those listed under the U.S. dollar traded ticker HMMJ.U. The approximate U.S. dollar equivalent distribution rate for HMMJ.U was $ 0.18265 per unit. For unitholders who hold the U.S. dollar traded HMMJ.U, distribution payments will typically be converted to U.S. dollars by the unitholder’s account holder.

Distributions for HMMJ/HMMJ.U are declared at the discretion of Horizons ETFs and may not be announced with a set frequency. With a limited operating history, Horizons ETFs believes that the disclosure of an annualized yield for the ETF at this time would be misleading to unitholders.

Horizons ETFs is a member of Mirae Asset Global Investments. Commissions, management fees and applicable sales taxes all may be associated with an investment in the Horizons Marijuana Life Sciences Index ETF listed herein and managed by Horizons ETFs Management (Canada) Inc. (the “ETF”).

The ETF is not guaranteed, its value changes frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

Certain statements may constitute a forward looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

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