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Market Update for May 2018 – Leveraged Marijuana?

By Isaac Schweigert | June 26, 2018

May was a good month for stocks, both in Canada and most international markets. Bonds also performed well.  Meanwhile, at the other end of the risk spectrum, the first leveraged marijuana ETF has been launched.

 

May 2018 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

 

 

*Absolute change in yield, not the return from holding the security.

 

The S&P/TSX Composite had its best month since September 2017 and was up more than +3%.   In the US, the S&P500 was up +2.4%, while the Russell 2000 (an index of small cap stocks) was up +5.9%.  European stocks were down -1.2% in May; German stocks were flat, while UK stocks were up +2.2%.  Emerging market stocks were down -2.4% in May.

The broad index of Canadian bonds, FTSE TMX Universe Bond Index was up +0.8% in May, bring its year-to-date back to flat, while the FTSE TMX Short Term Bond Index was up +0.2%. US bonds were positive, while emerging market bonds were up +0.2%.

Canadian REITs had a great month, and were up +3.0%, their best month since February 2017.

Oil was down -2.2% in May, but remains up +11% for 2018.  Gold was down -1.2% for the month; the broad Bloomberg Commodity Index was up +1.3%.

The Canadian Dollar declined -0.9% against the US Dollar, but gained +2.5% against the Euro, bringing its year-to-date back to flat.

Commentary

 

I guess it was only a matter of time, but leveraged and short ETFs are now available for the marijuana sector.  If it’s one thing the investment industry loves to do is add leverage to things; once they have a product that has a little bit of success they want to juice it up a little.

Horizons launched the Marijuana Life Sciences Index ETF (HMMJ) in April 2017.  Despite all the recent hype, it started slow: it rose +10% within a few days of its launch, and then dropped below its offer price, bottoming in July 2017, down -20% from its offering price.  Since then it’s been a wild ride, but almost all positive.  By January 2018 it was up almost +200% from that summer 2017 low.

We get a few inquiries at ModernAdvisor about buying marijuana stocks or ETFs, something we advise them that we can’t help them with.  Few people can stomach the volatility of investing only in stocks, which is one reason why all ModernAdvisor portfolios are diversified across stocks, bonds and REITs, both Canadian and international.

The daily volatility of HMMJ since its launch is 3.1%, or 49.1% annualized!  That level of volatility would be unsuitable for most investors.  By comparison, the S&P/TSX Composite Index’s annualized volatility is under 15%.  With strong performance it can be easy to overlook the volatility, until it goes the down.

With volatility that high it is surprising to hear the president and co-CEO of Horizons say that “Given the underlying volatility of this sector we believe there is demand from Canadian investors to take on more risk using leveraged ETFs to attempt to generate potentially higher short-term returns…”  The unleveraged HMMJ marijuana ETF is already very volatile, I can’t imagine many Canadian investors would want something twice as volatile!  And “potentially higher short-term returns” sounds a lot like gambling, not investing.

Leveraged ETFs don’t work the same way as a traditional leveraged investment strategy, where your leverage ratio changes with the performance of your investments, declining when they do well and rising when they decline.  Leveraged ETFs attempt to earn double the daily return of the index they track and then the leverage ratio is reset at the start of the next day.  Due to that unique feature, holding a leveraged ETF for more that a day or two isn’t recommended.

If you really want to invest in the marijuana sector make sure its not one of your core holdings, limiting your position size to less than 5% of your portfolio, and be prepared to lose 20% or more in a matter of days.  And avoid the leveraged ETFs!

 

May 2018 Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

Canada’s unemployment rate was unchanged at 5.8% in April for the third month in a row. 28,800 full time jobs were added in April while 30,000 part time jobs were lost.

Housing prices across Canada were up +0.2% in April with gains posted in 8 of 11 metropolitan areas.  The largest gainers were Quebec City (+1.5%), Hamilton (+0.8%), and Halifax (+0.6%).  The decliners were Winnipeg (-0.8%) and Ottawa (-0.1%); Calgary was flat.

The level of new housing starts declined -5.1% in April to 214K, while the value of building permits issued in March rose +3.1%%.

The inflation rate for April was +0.3%, and +2.2% on an annual basis.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was+1.5%.

Retail sales were up +0.6% in March; compared to a year ago, retail sales were up a healthy +4.1%.

Canada’s GDP growth was +0.3% for March, led by a +0.6% gain from the goods side with oil & gas up +1.9%.  The services sector rose +0.2% as increases in most sectors more than offset a -1.2% decline in the finance and insurance sector, the largest monthly decline since November 2008.  The Bank of Canada met on May 30, and as expected left the benchmark interest rate at +1.25%.

 

 

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics


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Isaac Schweigert

Isaac Schweigert

Isaac is a CFA charterholder and is Portfolio Manager and Chief Compliance Officer at ModernAdvisor. He has over 11 years of investment industry experience, including asset allocation, portfolio management, due diligence, compliance and reporting.