Rolling in the green? A closer look at cannabis ETFs’ market munchies

Abstract The investment landscape often grapples with the ethical dilemmas posed by “sin stocks,” shedding light on the complex interactions between investor sentiment, societal standards, and market behavior. Although sin stocks have been the subject of some analysis, the exploration into cannabis exchange-traded funds (ETFs) remains sparse. This research compares the performance of cannabis ETFs against both U.S. and international equities, delving into their correlation, returns, and risk across a variety of market scenarios, including the effects of the COVID-19 pandemic. The findings suggest that cannabis ETFs generally lag traditional equities, highlighting potential risks. While they performed better during the COVID-19 lockdown, the findings point to inadequate security selection and a lack of effective market timing strategies. Even though equally weighted portfolios that included cannabis ETFs and broader market indices provided a slight risk reduction when compared to investing in cannabis ETFs alone, they consistently underperformed the conventional equity indices in terms of risk-adjusted returns across all analyzed periods. The diversification benefit was most pronounced during the volatile COVID-19 closure period, but it was less effective in the post-vaccination market environment. Cannabis ETFs may promise higher returns, but their significant downside risk requires careful assessment to determine if the potential rewards justify the risk. This research stresses the importance of adopting careful investment strategies in this developing sector.