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What is a cannabis ETF?

“ETF” is short for “exchange-traded fund.” When you invest in an ETF, your funds are combined with funds from other investors to buy a basket of stocks or other assets around a specific goal. With cannabis ETF investments, your ETF shares represent a stake in a group of businesses in the marijuana industry.

With a cannabis ETF, you make one purchase that gives you exposure to a set of cannabis industry stocks. A marijuana mutual fund would work in a similar way in most respects. To do that, you'll need a brokerage account:

More: The differences between ETFs and mutual funds here

The biggest benefit of a cannabis ETF over buying an individual stock in a cannabis company is diversification. When you buy shares of an ETF, you own a stake in multiple marijuana companies with one purchase. If one of the underlying stocks goes down in price, it won't necessarily spoil your entire investment.

Other ETFs give you investment exposure in diverse market indices, industries, geographic areas, investment themes, and other criteria.

Did you know: Cannabis is the name of the plant that many people refer to as marijuana. When it comes to cannabis ETF or marijuana ETF options, you can use the terms interchangeably.

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Are cannabis ETFs a safe investment?

No. Cannabis stocks offer a unique investment opportunity unlike any other. That is due to the industry's legal status. As you likely know, the U.S. government considers marijuana an illegal Schedule 1 drug. That means it is illegal for all recreational and medicinal uses.

However, 17 states have made marijuana legal for recreational use and 33 have made marijuana legal for medicinal use. That puts state laws at odds with federal laws. Some legal experts argue that federal law takes precedence over state laws. Future court cases and legal actions will probably clearly define what's legal and what's not.

In the meantime, the cannabis industry in the U.S. operates in a gray area. While it may be very profitable and growing at a fast rate, an action by the Attorney General, Congress or a federal court could quickly shut down all marijuana-related businesses.

Also, many marijuana businesses struggle with basic needs like banking and payment processing because of the legal challenges in the industry. This adds further risks and challenges to an already risky industry.

Internationally, the cannabis market is similar, with some countries legalizing it and others allowing only certain aspects of the industry such as CBD or hemp. For example, recreational and medicinal cannabis is legal in Canada but is strictly regulated. But the U.K. allows only medicinal cannabis use.

More: How to invest in stocks

When marijuana ETFs might be a good investment

Now that you know the biggest reasons to avoid marijuana investments, here is the good news. A lot of people use cannabis products and those can be very lucrative.

  • Grand View Research estimates that the legal marijuana market will be worth $73.6 billion worldwide by 2027. This represents a growth rate of 18.1% over the next seven years. Most investors would salivate over an industry that's expected to grow by nearly 20% per year for the better part of the next decade.
  • If federal laws are relaxed, this growth rate could be even higher. If you own shares of a marijuana ETF that owns businesses that do well, your investment value is almost certain to skyrocket. But as we discussed, there's also a risk that your investment could go down to zero.
  • Cannabis ETFs are best for speculative investment dollars that you can afford to lose. Similar to cryptocurrencies and other highly speculative investments, there's a very good chance you could lose some or all of your initial investment when putting money into a cannabis ETF. Invest only if you understand and accept those risks.

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How to invest in cannabis ETFs

Invest in cannabis ETFs the same way you invest in any other ETF. Just look for the ticker of the ETF on a stock screener or on your stock broker website. Once you decide which ETF to invest in, place an order with your stock broker. If you don't have a stock broker, check out our top recommended online brokers.

Before you invest in a cannabis ETF, make sure it fits with your investing goals and strategies.

Here are some of the marijuana ETFs you might come across:

  • ETFMG Alternative Harvest ETF (MJ)
  • Cannabis ETF (TCHX)
  • AdvisorShares Pure Cannabis ETF (YOLO)
  • Indxx MicroSectors Cannabis ETN (MMJJ)
  • Global X Cannabis (POTX)
  • Cambria Cannabis ETF (TOKE)

More: Beginner's guide to investing in cannabis stocks

Don't risk too much in a marijuana ETF

While cannabis ETF investing is risky, there's always a chance you could see your investment double, triple, quadruple, or more. If cannabis becomes fully legalized, there's a good chance you'll make a small fortune. But if things go the other way, you could lose it all.

That makes investments in cannabis stocks, ETFs, and mutual funds very risky and very speculative. That works for some investors, but it isn't a good choice for everyone.

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Eric Rosenberg Freelance Contributor

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time.

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