The 2016 election kicked off a major run for marijuana stocks.
After that run, however, the value of the marijuana industry is still relatively tiny.
The total value of marijuana stocks is less than $15 billion, or about 1/12th the size of Anheuser Busch Inbev (BUD).
The catalyst to drive marijuana stocks to the next level higher could now be just weeks away.
Viridian Capital Advisors, the firm which publishes the Viridian Cannabis Stock Index, recently revealed it has filed the necessary documents to create
the first marijuana stock exchange traded fund (ETF).
The creation of an ETF would give investors the instant diversification they often seek, a highly liquid vehicle to do it in, and open up the $3 trillion+
An ETF market to marijuana stocks?
This is a major news event for so many reasons.
The key is far simpler than most investors realize and history shows it could be a major catalyst for marijuana stocks.
Color Me Cynical…
Before I show you how important this is, I want to go over a basic principle of investing in stocks.
A stock’s value is determined by what other investors are willing to pay for it.
When there are more buyers than sellers, a stock goes up.
When there are more sellers than buyers, a stock goes down.
It really is that simple.
I’m not trying to cast aside fundamental analysis of revenue, earnings, margins, growth, and all the other factors that go into a company’s value and therefore it’s stock’s price.
They are important, but not in a direct way.
Those are factors which drive investors’ buying and selling decisions and those decisions and actions affect the stock price.
So yes the fundamentals do matter, but not directly.
That’s why the creation of this ETF -- and its subsequent wide adoption -- could be the biggest driver of marijuana sector stocks this year.
Just look at what happened in the past.
Show Me The Money
The rise in popularity of ETFs has had a great impact on investors and markets over the last few years.
Investors are attracted to the instant diversification, low fees, and liquidity ETFs offer.
More importantly, an ETF launch, has the proven potential to bring new and large investors into a sector.
Take a look at the gold market over a decade ago.
For decades gold was one of the worst-performing investments you could buy.
After gold prices peaked in the late 70s above $800 an ounce before entering a 25 year bear market which saw the price drop all the way down to less than $300 an ounce.
At its bottom some pundits called it a financial “relic” of a bygone era.
Gold was anything but a mainstream investment.
Aside from decades of declines, gold was also tough to buy.
Either you had to buy physical gold bullion and store it or you had to buy on the commodities future markets.
All that changed in the early 2000s with the creation of the first gold-based ETF.
The creation of the ETF made gold investing easy. An investor could buy and sell the ETF like a regular stock and the ETF did the buying and selling of gold futures, rolling them over as they expired, and, generally, took care of all the legwork.
As a result, gold went on to become a mainstream investment class which saw regular and institutional investors plow tens of billions of dollars into gold ETFs in the years that followed.
This chart from MarketWatch shows the rise of investors interest in gold ETF:
The ETF allowed the easy flow of money into gold and played a critical role in making a the gold bull market one of the biggest and most profitable runs of the last decade.
The creation of a marijuana-based ETF could do the same for marijuana stocks.
As of now, this is the marijuana investment story to watch.
It could be the single change that opens up the floodgates of investor capital into marijuana stocks, which until now, have had a good run, but are still relatively tiny compared to every other industry in the financial markets.