Cannabis investing has been hugely popular recently, and the surge in pot stock prices to start 2019 has driven a lot of interest in the industry. In particular, the landmark exchange-traded fund ETFMG Alternative Harvest (NYSEMKT:MJ) has been hugely successful, recently topping the $1 billion mark in assets under management and seeing good gains to begin the year.
But even though investors don’t typically ask questions when things are going well, there’s one thing about ETFMG Alternative Harvest that’s hard to explain. As of Feb. 5, despite holding three dozen stocks in its portfolio of holdings, Alternative Harvest has almost a fifth of its assets invested in a single stock — and it wasn’t even the biggest company in the market. Even though most cannabis investors have paid most of their attention to a small number of first-moving stocks in the field, Alternative Harvest’s particular mix raises some questions about the methodology that the underlying Prime Alternative Harvest Index uses to select and weight the stocks in its investing universe.
You can see below a list of Alternative Harvest’s top five stock holdings as of Feb. 5…
| Stock | Weighting in Fund | Market Capitalization |
|---|---|---|
| Cronos Group (NASDAQ:CRON) | 18.6% | $3.49 billion |
| Canopy Growth (NYSE:CGC) | 8.7% | $15.9 billion |
| Aurora Cannabis (NYSE:ACB) | 7.7% | $7.51 billion |
| Tilray (NASDAQ:TLRY) | 5.6% | $7.28 billion |
| OrganiGram Holdings (NASDAQOTH:OGRMF) | 4.4% | $700 million |
DATA SOURCE: ETFMG, YAHOO! FINANCE.
At first glance, this weighting scheme looks pretty odd. Most ETFs use a system that’s based on market capitalization, giving the largest companies the highest weightings. Using such a system, you’d expect Canopy, Aurora, and Tilray all to have much larger weightings than Cronos, because their market capitalizations are anywhere from two to five times higher than Cronos’ market cap.
However, not all indexes use straight market-cap weighting. On its website, ETFMG refers to its tracking index, the Prime Alternative Harvest Index, as its primary authority in making investment decisions. The prospectus makes limited references to the actual methodology that the index follows, instead focusing on how it takes the…
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