By Brian Baker ///
As marijuana continues to expand the number of places where it is legal, some investors are excited about the profit potential for the cannabis industry. Total legal cannabis sales are expected to grow 16 percent a year and reach $43 billion by 2025, according to cannabis research firm New Frontier Data. Medical benefits and the growing use of products tied to cannabidiol, or CBD, make the cannabis industry ripe for continued growth.
Reasons to consider investing in cannabis
Any investment in a company or industry will ultimately depend on the profits those companies are able to deliver to shareholders. The cannabis industry is no different, but there are some reasons to be excited if you’re a potential investor.
Growth potential: The cannabis industry is still relatively young, with many states only just recently legalizing the drug. This leaves plenty of room for future growth that could come from further legalization, possibly at the federal level, and a wider adoption of products and uses.
New products and uses: Many people have an outdated image in their head when it comes to marijuana, but new products are being developed constantly. The drug’s effectiveness is currently being studied in treating conditions such as Alzheimer’s, Crohn’s disease and certain forms of cancer. CBD-related products have also grown in popularity in recent years, with consumers purchasing items such as CBD oils, beverages and even chewing gum.
Growth creates investment opportunities: As companies work to innovate in the fast-changing industry, investment opportunities will be created for those willing to do some research. While there are risks associated with fast-growing industries, the opportunities created can outweigh those concerns.
How to invest in the cannabis industry
Once you’ve decided whether investing in the cannabis industry makes sense for you, there are a few different ways to actually invest — many of which are accessible through your preferred online broker or favorite investment app.
One way to participate in the cannabis industry is by purchasing the stock of companies with ties to marijuana. Cresco Labs (CRLBF) is involved in growing, manufacturing and distributing cannabis-related products for consumers and currently operates in 10 states. But potential investors should be aware that the company failed to generate net income for shareholders in each of the past three years. The stock trades over-the-counter, or OTC.
Another option is the Horizons U.S. Marijuana Index ETF (HMUS), which began trading in April 2019. This ETF holds shares in U.S. companies and comes with a hefty expense ratio of 0.85 percent. It tracks the performance of the U.S. Marijuana Companies Index. One thing to note, the ETF trades in Canada and is therefore quoted in Canadian dollars. It’s relatively small with about CA$30 million in assets as of September 2021.
Risks of investing in cannabis
While the growth potential of the cannabis industry may sound exciting, there are some key risks to keep in mind.
Legal/regulations: Although the trend has been toward more legalization, it is important to remember that the drug is still illegal at the federal level, which makes it difficult for companies in the cannabis industry to raise money through traditional banks, which are federally regulated. The laws can vary from state to state and may swing based on which political party is in power. In places where it’s legal, high tax rates on sales and other costly regulations can make profitability difficult for companies.
Increased competition: The growth potential of the industry attracts a lot of companies and entrepreneurs looking to capitalize on a booming industry. But that also means it will be very competitive, which could impact the return on investment earned by shareholders. Just because an industry is poised for growth doesn’t mean that shareholders will benefit. Airlines generated losses for decades despite delivering enormous innovation to the general public.
Early days: The industry is still quite young and just beginning to develop. Many companies have yet to earn a profit, but promise great future returns to shareholders. While the potential is there for gains, keep in mind that investors only benefit if there ultimately are future profits to be divided up.
The cannabis industry is likely to continue to grow in the coming years and investors may look to benefit from that growth through stock ownership or ETFs that track the industry. But remember that innovation doesn’t always lead to profits for shareholders and high-fee ETFs can eat into your ultimate return.
Original Article: https://www.bankrate.com/investing/how-to-invest-in-cannabis/