Cathie Wood’s ARK Innovation ETF has been synonymous with growth stocks. The exchange-traded fund (ETF) is full of some of the most exciting stocks on the markets today, including Tesla, Zoom, Square, and many others. But the fund may be a bit too heavily tilted in the direction of overpriced tech stocks, which make up nearly one-third of its holdings. And some of the holdings, like Tesla, Square, and Coinbase, make the fund a bit riskier due to the exposure they have to cryptocurrencies.
Growth investors may be better off focusing on another ETF instead: AdvisorShares Pure US Cannabis ETF (NYSEMKT:MSOS). The fund holds investments in the top multi-state marijuana operators in the country. This ETF looks like a more surefire way to generate some strong returns over the long term compared to the ARK ETF. Here are just a few of the reasons why I see it as a better option.
The cannabis industry is still in its infancy
Many growth stocks in the ARK Innovation ETF are posting strong sales numbers, but many pot stocks are at a whole other level — doubling, sometimes tripling their prior-year numbers. Curaleaf Holdings, a top cannabis company, reported $312 million in revenue for the period ending June 30, representing year-over-year revenue growth of 166%. The company is on pace to hit the $1 billion mark in annual revenue and could be the first marijuana producer to do so.
But what’s exciting is that there’s no reason to expect that it will stop there. There are only 19 states that have passed legislation to legalize recreational marijuana use thus far. And with Senate Majority Leader Chuck Schumer pushing for the federal legalization of marijuana, the market could significantly open up in the not-too-distant future.
According to estimates from cannabis research company BDSA last year, the U.S. marijuana market could be worth $34.5 billion in 2025, increasing at a compounded annual growth rate (CAGR) of 18% until then. But as more states legalize marijuana and markets open up, those projections will likely get a boost. Globally, BDSA expects the CAGR for the industry to be 22%. And in the European market, the growth could be as high as 42%.
Investing in such a high-growth sector can make it easy for investors to earn some great returns by simply buying and holding. Whether they buy Curaleaf, Green Thumb Industries, or another top marijuana stock, cannabis investors could all do well in the years ahead.
Why the Pure US Cannabis ETF is a better option than other funds
There are multiple cannabis ETFs out there, but the reason I like the Pure US Cannabis ETF is that, as the name suggests, the fund focuses on the U.S. market. It is important to avoid Canadian-based marijuana stocks that have struggled to generate consistent growth and that may have already peaked. Investors are also paying higher premiums for Canadian stocks.
Canadian marijuana producer Tilray is one of the better-valued stocks listed above, but it’s trading at a higher forward price-to-sales multiple than some of the largest cannabis companies in the U.S. One of the reasons for this is that plant-touching marijuana stocks in the U.S. can’t trade on a major exchange like the New York Stock Exchange or Nasdaq Stock Market due to the federal ban on cannabis. That means they aren’t able to reach the same pool of potential investors that Canadian pot stocks can.
But that can change with marijuana reform if it loosens up the laws enough to allow U.S. cannabis producers to trade on major exchanges. That alone could be a significant catalyst for the industry that sends shares of Curaleaf, Green Thumb, and other U.S. pot stocks soaring.
Why now is a great time to invest in this marijuana ETF
Over the past six months, the Pure US Cannabis ETF has fallen more than 36% while the ARK Innovation ETF is down just 17% (while the S&P 500 has risen 16%). Growth stocks, in general, have been struggling of late, but the perceived risk in the cannabis industry and the lack of profitability in the sector has sent pot stocks into even more of a sell-off.
For long-term growth investors, the drop in value could make now an opportune time to load up on marijuana stocks. And rather than picking between cannabis companies and trying to predict which one will outperform the other, it’s easier to take a position in all of the major ones and invest in the Pure US Cannabis ETF.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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