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Aug 13, 2019

Bizarre pot stock moves may be linked to blockbuster ETF trades

Cannabis plants grow at a craft grow operation outside of Nelson, British Columbia.

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Sharp moves by several pot stocks in the final minutes of trading last week may be the result of trades by the largest cannabis exchange-traded fund.

The US$1 billion ETFMG Alternative Harvest ETF recently added about 5.5 million shares of CannTrust Holdings Inc., according to holdings data compiled by Bloomberg. The medical cannabis producer jumped about 40 per cent in the last hour of trading on Friday after spending most of the day in the red. Conversely, the fund, known as MJ, has significantly reduced its positions in Auxly Cannabis Group Inc., Vivo Cannabis Inc., Supreme Cannabis Co. and Canopy Rivers Inc., which all fell by at least 13 per cent.

Tricia Vanderslice, chief marketing officer for MJ issuer ETF Managers Group, declined to comment.

All that buying and selling looks to have moved MJ closer to its underlying benchmark. CannTrust, for example, has a 4 per cent weight in the Prime Alternative Harvest Index that MJ tracks, but had shrunk to less than 2 per cent of the ETF because of regulatory breaches that have halved the value of the pot producer’s stock since early July.

Auxly, meanwhile, makes up 0.4 per cent of the gauge, but rose to 1.3 per cent of MJ after the cannabis cultivator secured an investment from U.K.-based cigarette maker Imperial Brands Plc. Its shares have gained almost 30 per cent since the deal was announced in July.

It’s typical for thematic ETFs like MJ to build in flexibility so they can keep pace with the sector’s volatility, said Eric Balchunas, an ETF analyst for Bloomberg Intelligence.

“In the case of marijuana, it’s like taming a wild horse,” he said. “If it wasn’t able to make small adjustments on the fly because its underlying holdings are changing so quickly, it’s possible that is a worse evil than situations like this.”

MJ formally rebalances every quarter to reflect any changes to its index, but it has the flexibility to trade in advance “to minimize the market impact,” according to its prospectus. The ETF’s year-to-date return of 15 per cent lags the index’s return of about 17 per cent, according to data compiled by Bloomberg.

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.