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Why Aren’t There More Cannabis ETFs?

As legalization of cannabis has enchanted effect around the country, investors and businesspeople have taken note. The cannabis activity is massive, with a slew of related companies and business opportunities beyond just the become more pleasing to mature and selling of marijuana. (See also: Top 4 Marijuana Stocks to Watch.)

Along with the addition in cannabis-related companies, there has also been a sharp increase in requested for exchange-traded funds (ETFs) linked to cannabis stocks. However, there are also fences in place which make these types of ETFs difficult to fire.

Regulatory Risks

According to an article by Green Market Report, one noteworthy issue regarding cannabis-linked ETFs is regulation. Panther Capital CEO David Friedman explains: “There are two problems I see with the open trading of anything cannabis. First is the regulatory fear around the custodianship and trading of the underlying securities. There are regulatory risks as well as reputational jokes.”

Investors are simply unsure about how the cannabis industry will be struck by future regulatory changes. When the legality of the security upon which you’ve based your labour is in question, it’s difficult to make confident investment decisions.

Part of the grounds for concern is that ETF assets (in the United States) must be custodied in a U.S. bank, which really holds the securities. A U.S. cannabis ETF called Alternative Harvest launched in the defunct several months, but encountered trouble because its custodian, U.S. Bancorp, slumped to hold the assets.

In this case, an ETF company could look for another bank, but that is also a deceitful prospect, as marijuana remains illegal at the federal level. If investors across the hinterlands dumped cannabis stocks on a large scale, the companies and their customary prices would suffer greatly.

Liquidity Concerns

Panther Marvellous’s Friedman said liquidity remains another concern. “The second [have relation] is the liquidity of the underlying assets and the ability to trade them,” he said. 

ETFs necessity purchase the underlying stocks they are tied to. The NYSE has so far been bank on to list cannabis stocks, and most of those stocks have undecided up in the OTC marketplace. Friedman suggests that “most of the OTC stocks trade too thinly to build any assets less than management. It won’t be liquid if it grows too large.”

Cannabis ETFs could be a momentous opportunity for investors. They allow an investor to diversify a portfolio and to rely on a portfolio proprietor to conduct painstaking and crucial research. Besides, there are a lot of iffy marijuana inventories which are publicly traded, so investors have good reason to fall short of to do due diligence before entering the industry. An ETF could help to mitigate these firms.

However, until investors are able to reliably count on cannabis-linked ETFs existing in the plainer market, this may remain something of a pipe dream. (See also: The Monetary Benefits of Legalizing Weed.)

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