Just 10 years ago, not many people would have considered the weed industry a sound investment. But in the span of less than a decade, marijuana went from illegal in all 50 U.S. states to legal (at least in some capacity) in more than half of states.
In 2021, it’s easier than ever for individuals to invest in the marijuana industry. However, we’re not totally out of the “weeds” yet when it comes to regulation and normalization of the cannabis sector. Until buying, selling, and using marijuana is totally legal on the federal level for every purpose (recreational and medicinal), the industry will likely continue experiencing some volatility.
Keep reading to learn some of the history of the cannabis industry, how to invest in marijuana stocks and ETFs, and risks to consider before adding marijuana stocks to your portfolio.
About the Marijuana Industry
We must remember the weed business is young. The beginning of the U.S. investable cannabis industry was just a little more than six years ago, in January 2014, according to Morgan Paxhia, the co-founder and managing director of Poseidon Investment Management.
Though recreational marijuana was legalized in 2012, businesses didn’t open their doors to selling it until two years later.
“This period was the first month of adult-use legal sales starting in Colorado and the beginning of a tightly regulated market,” Paxhia said.
Prior to January 2014, there were medical markets in the U.S. as early as 1996, according to Paxhia. However, those markets were generally not-for-profit, so there was no equity to own and limited invested capital before recreational weed stores became a thing.
Over the past seven years, 18 states and the District of Columbia have decriminalized cannabis for nonmedical use, which has allowed the industry to grow by leaps and bounds. In fact, 2020 was considered by many to be a breakout year for the industry, as legal sales passed $17.5 billion in the United States, up 46% from the previous year.
And as the marijuana industry grows in the United States, there are more opportunities to invest in it.
How to Invest in Marijuana Stocks
Individuals can invest in the marijuana industry by purchasing the stock of the companies within it. The companies that operate in the cannabis industry generally fall into three categories:
- Marijuana growers and retailers
- Ancillary product and service providers
- Marijuana-focused biotechnology companies
The process of investing in cannabis stocks is largely the same as any other industry. These stocks trade on U.S. stock exchanges like the Nasdaq, and you can buy and sell them through any major brokerage firm.
Before investing in general, it’s important to do research. This includes marijuana stock. First, look at the company’s financial performance since it went public. You can compare its performance to that of its competitors. Another way to analyze the company’s financial performance is by reviewing the financial statements it has filed with the Securities and Exchange Commission.
As with any niche or alternative investment, personal finance experts recommend limiting marijuana stocks to a small percentage of your overall portfolio. Many experts suggest having a max of 5% of your investment portfolio in alternative assets such as cannabis and cryptocurrency. The rest should be kept in broad, diversified index funds.
Top Marijuana Stocks to Buy in 2021
There are literally hundreds of marijuana stocks to choose from in 2021. As we mentioned, cannabis companies can fall into several categories, including growers & retailers, ancillary product & service providers, and marijuana biotech companies.
Some of the top marijuana stocks on the market today include:
- Curaleaf Holdings (CURLF)
- Canopy Growth Corporation (CGC)
- Green Thumb Industries (GTBIF)
- Tilray (TLRY)
- Cronos Groups (CRON)
In addition to some of the newer cannabis companies in the industry, there are also companies that have been around far longer that have joined the industry. In fact, there are probably some names you recognize on the list. Those companies include:
- Anheuser-Busch (BUD)
- Altria (MO)
- Scotts Miracle-Gro (SMG)
The benefit of investing in these companies is that they have a proven track record that goes back further than their participation in the cannabis industry. And because marijuana is just one line of business in which they operate, they may be more insulated from some of the industry’s volatility. Remember that when it comes to investing, experts recommend diversifying your portfolio, which means spreading out your investments in broad funds rather than individual stocks.
Investing in Marijuana Exchange-Traded Funds
Rather than investing in individual stocks, you can also add marijuana exchange-traded funds (ETFs) to your portfolio. An ETF is a pooled investment that takes the money from many investors and uses it to buy many different stocks. When you invest in an ETF, you essentially invest in all the stocks within the fund.
That being said, cannabis ETFs aren’t without risk. Companies in any emerging industry face higher volatility and potential to fail, so investors need to prepare accordingly. Investors should also check the expense ratio of any fund before investing, since industry-specific ETFs may charge relatively high fees.
You can limit these risks and costs by keeping cannabis investments to a small percentage of your overall portfolio, and keeping the rest in broad index funds.
Investing in a marijuana ETF comes with all of the same perks as investing in marijuana stocks, but with additional diversification to protect your portfolio. If you’re new to marijuana investing, an ETF is a great place to start.
The Risks of Investing in Marijuana Stocks
Before investing in marijuana stocks (or anything else, for that matter), it’s important to consider all of the risks and understand what you’re getting yourself into.
“Many stocks in our space go through major upswings and drawdowns,” Paxhia said. “2021 is a prime example with several cannabis stocks rallying significantly until February 2021 and then falling as much or more than 50-60% as of October 2021.”
With the cannabis industry being so young in the United States, this volatility isn’t necessarily a surprise. Still, it may come as a shock to investors who haven’t experienced extreme volatility in their portfolios before, or whose portfolios are too heavily tilted toward cannabis.
Should You Invest in Marijuana Stocks?
As with any investment, someone considering investing in marijuana stocks should do their research and consider why the investment would make a good addition to their portfolio. It’s important to do your due diligence and understand the risk of this new industry.
If you’re considering investing in marijuana stocks or ETFs, make sure you have your other financial ducks in a row first. For example, make sure you’re currently investing enough in your 401(k) plan or individual retirement account (IRA) to meet your retirement goals. You can use this online retirement calculator to determine just how much you should be saving.
Once you’ve prioritized your retirement savings and are financially comfortable otherwise, then you can start adding cannabis to a small portion of your portfolio. But given the industry’s volatility, be sure you’re only investing money you can afford to lose.