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Cannabis Exchange-Traded Funds (ETFs) surged in value in September as positive federal action renewed investor interest in the cannabis industry. Shortly after the U.S. Department of Health and Human Services recommended that the Drug Enforcement Administration (DEA) reclassify cannabis to Schedule III from Schedule I and ease federal marijuana restrictions, marijuana-related ETFs began to soar as investors started investing in the cannabis industry.
America’s state-legal cannabis sector is the fastest-growing sector in the nation, generating billions of dollars in yearly revenue. However, the industry has been consistently handicapped by federal regulation. Federal law still classifies cannabis as a Schedule I drug with no medical application, which has made operating in the state-level industry extremely difficult. Issues like limited access to banking services and federal financial aid are prevalent throughout the industry and have likely prevented investors from investing in the cannabis sector.
For example, the Poseidon Dynamic Cannabis ETF by AdvisorShares went down in August amid declining investor interest in marijuana. The fund’s comanager Morgan Paxhia said at the time that the closure of the fund was partly due to a “dramatic shift in investor sentiment” that has affected the nation’s state-level marijuana industry.
Now that federal lawmakers are flirting with the idea of decriminalizing and possibly legalizing the quasilegal sector at the federal level, investor interest is rising. Last week, AdvisorShares Pure US cannabis (MSOS) was up by 56% and ETFMG Alternative Harvest (MJ) soared by 47% while both the SP 500 and the Dow Jones Industrial Average were up by just around 0.5%,
Matt Bottomley, an analyst from financial services firm Canaccord Genuity, noted that federal headlines often act as catalysts for how certain stocks trade. He observed that recent cannabis-related headlines had a positive effect on cannabis ETFs.
The Biden administration’s recommendation for cannabis reclassification at the federal level also caused the shares of cannabis companies such as Cronos Group, Tilray Brands and Canopy Growth Corp. (NASDAQ: CGC) (TSX: WEED) to surge. This has been a boon for cannabis equities, which have suffered from a capital crunch in recent years as many investors withdrew from the industry.
Despite extensive legalization at the state level, federal prohibition has consistently been a thorn in the cannabis industry’s side, limiting the sector’s access to financing and preventing it from expanding to broader markets. The prospect of finally legalizing cannabis at the federal level and eliminating the barriers that limit trade in the sector will likely attract more investors to cannabis-related equities.
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