Since the emergence of the marijuana marketplace in 2014, the number of dispensaries and growing facilities has skyrocketed. The industry recently surpassed a market value of $10 billion dollars worldwide, with the value expected to reach $146.4 billion by the end of 2025, according to a new report by Grand View Research.
In places like Colorado, where dispensary chains such as Native Roots, Green Solution, and LivWell are setting up shop at multiple locations throughout the state, it’s increasingly evident that the cannabis business will continue to climb higher and higher.
Currently, 10 states and Washington, D.C., have legalized recreational marijuana use for adults, according to the National Conference of State Legislatures (NCSL). In 2018, 21 states considered bills that would also legalize it, and many more states have mixed laws surrounding its use and distribution.
Despite the continuing nationwide debate regarding the legality of its recreational usage, investors and financiers are vying to get in on the ground floor of the marijuana marketplace. And given it may not be long until it’s legal at a federal level, it’s an investment certainly worth considering.
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What the Marijuana Marketplace Looks Like Now
You can currently buy marijuana stocks in a number of companies, such as Aurora Cannabis, Canopy Growth Corporation, and Cronos Group. Many of these companies are based in Canada, where legalization in 2018 paved the way for a marketplace far less regulated than that of its southern neighbor.
There are a few companies, such as GW Pharmaceuticals and Innovative Industrial Properties, whose diversified business dealings operate at the intersection of marijuana and pharmaceuticals (GW) or marijuana and property (IIP). Both are listed on the New York Stock Exchange.
Besides stock ownership, much of the marijuana marketplace investment within the United States occurs in the form of commodity purchases.
“A commodity is a raw or agricultural product that can be traded, such as coffee or oil,” says Luca de la Torre, general partner at Contender Venture Capital. As such, marijuana commodities are sold much like one would sell other agricultural products such as corn or wheat.
Cannabis as a Commodity
The marijuana marketplace also facilitates transactions involving cannabis oils, waxes, and baked goods containing marijuana. This is much the same as how orange juice, crude oil, beans, sugar, and other commodities have been traded at the Chicago Mercantile Exchange since 1898.
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“We produce a cash price or real, live transactions,” says Steve Janjic, CEO of Amercanex, based in Denver, Colorado. “It’s what we call spot daily transactions, which happen in the moment, not in the future.”
Over the past several years, most commodities have dramatically underperformed in the stock market. But when there is a turnaround in commodity prices, there will be potential to earn good returns. As a result, commodities could be an interesting way to look for an alternative to just putting every dollar in equities, according to Steve Cucchiaro, chief investment officer of 3Edge Asset Management in Boston.
“Right now we have a synchronized global economy where no individual major economy is in recession,” Cucchiaro says.
“This could be good news for the demand for commodities. The big risk, however, is that if there should be a sudden interruption in the global economy, the demand for commodities would fall.”
Investing in Commodities
While economists are not predicting a global recession in the near future, commodities — including legal marijuana — can still be a risky investment. That being said, there are ways of mitigating your risk.
“One way to invest in commodities is to buy the shares of commodity producers,” Cucchiaro says. “But if the stock market falls sharply, then commodity producers’ share prices might fall along with the stock market rather than rise with the commodities market.”
While commodities are known for being risky, “the good thing about that volatility is that it performs differently than stocks and bonds,” says Morgan Ranstrom, CFA, CFP, and co-founder of Trailhead Planners in Minneapolis, Minnesota.
That’s because prices of commodities are often negatively correlated with prices of stocks and bonds when the annual inflation rate in an economy is expected to rise. A higher inflation rate pushes up commodity prices, but brings down prices of equities and bonds.
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“So use commodities for diversification purposes only and not for outperforming the stock market,” Ranstrom adds.
Most financial advisers recommend investing in an exchange-traded fund (ETF) that tracks a broadly based commodity index for its diversified investments.
Cannabis ETFs like ETFMG Alternative Harvest and AdvisorShares Vice are both exchange-traded funds with a focus on legal marijuana. These ETFs protect against the risk of buying cannabis commodities from a singular dispensary or cultivator.
Additional reporting by Juliette Fairley.