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Cannabis: The Investment of the Future?

There’s a dispensary at the corner of Wolff Street and 38th Avenue in North Denver. When recreational marijuana was legalized in Colorado in 2014, the boomer husband-and-wife duo who owned the joint (pun heavily intended) ran it out of a tiny, slightly dilapidated white house.

Today, that small white house is no longer. It is now a sleek, stucco, dark gray house with lime-green accents. The business swiftly expanded to include the large neighboring brick building, which had been abandoned for many years. The entire block has been transformed and beautified by the booming business.

The marijuana industry is among the fastest-growing job markets, according to CNBC, and consumption doesn’t seem to be going anywhere. Usage is growing among baby boomers, GenXers and millennials. Bloomberg reports that the Gen Z cohort (those born after 1998) will be the “ultimate pot consumers” with their $143 billion in buying power (according to Forbes).

Sales Projected to Increase

Arcview Market Research and BDS Analytics found that legal cannabis sales totaled $11 billion in 2018 and they are projected to grow 350 percent over the next 10 years. To put that in perspective, U.S. beer sales (domestic premium brands), totaled $12.6 billion in 2018.

Clients Are Asking About It

For the first time this year, the Journal asked about cannabis investments in our annual Trends in Investing Survey. More than half (55 percent) of respondents said that clients have inquired about investing in marijuana or cannabis stocks/companies in the past six months (see key results of the survey on page 18).

Various Opportunities to Invest

Marijuana Business Daily reports that retail and cultivation continues to lead the pack in terms of cannabis investment, but other opportunities exist. The Motley Fool reported that investors should keep an eye on the companies that have product differentiation, such as cannabis alternatives. Also, keep an eye on the international demand for medical marijuana. Canada will decide this year whether to legalize products other than dried cannabis and cannabis oils.

Editor’s note: This article originally appeared in the June issue of the Journal of Financial Planning in the Observer section. The Journal of Financial Planning is a member benefit for Financial Planning Association members. Not a member yet? Become one today.

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Ana Trujillo Limón is senior editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org, or connect with her on LinkedIn

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What Financial Planners and Their Clients Need to Know About the Latest ETF Investing Trends

Among the top goals for a financial planner is to maximize the investment return for their clients with an acceptable level of risk. Managing risk typically centers around diversification—not putting too many eggs into any one basket. Exchange-traded funds (ETFs) have proven to be an excellent vehicle for diversification due to the evolution of the ETF industry. It is probably fair to say that the growth of ETFs has been largely tied to the growth of the financial advisory industry and the democratization of investment advice and knowledge throughout our economy.

The FPA and Journal of Financial Planning Trends in Investing Survey found that 88 percent of advisers surveyed currently use or recommend the use of ETFs with clients, and 45 percent said they plan to increase the use or recommendation of ETFs in the next 12 months.

The largest ETFs are based on indices, funds that are designed to track asset classes and sectors within those asset classes. Financial planners typically recommend exposure to both equities and fixed income securities, and diversification among sectors of the economy and different economies around the world. ETF issuers have met this demand with index ETFs covering virtually every asset class, market capitalization, sector and geographic subdivision of the world economy.

New ETFs continue to be created with a trend toward applying a different angle, smart beta or active strategy, or implementation of investment philosophy to offer new twists on existing themes. The FPA and Journal of Financial Planning Trends in Investing Survey found that a majority of planners surveyed continue to favor a blend of active and passive management.

ETFs seem to be the vehicle of choice for the average consumer, with the notable exception of defined-contribution retirement plans. ETFs have a structural advantage, especially for taxable shareholder accounts. Financial advisers will likely continue to shift toward increased use of ETFs.

As the ETF industry continues to grow and evolve, three themes are dominating headlines today:

1.) Cannabis funds

There are currently four or five cannabis funds in the marketplace, with at least three more in registration. One cannabis fund already launched this month and another is expected to go effective in the coming week, issued by Innovation Shares and Amplify ETFs respectively. Most observers tend to believe there is space in the market for several funds, especially because each has a slightly different approach. Innovation Shares offers an index fund and Amplify ETFs plans an active strategy, for instance. As analysts begin to compare the funds and their styles, many believe the oldest fund, the ETFMG Alternative Harvest ETF (MJ), will suffer loss in assets as its alignment with the actual cannabis industry is thin at best. Time will tell, but the cannabis sector certainly has created a buzz.

2.) Non-transparent ETFs

ETFs that do not disclose their actual portfolio has been a goal for many portfolio managers, many of whom seem to believe that the rest of the portfolio management industry is anxiously trying to find out “just how they do it.” There is very little, if any, demand by the actual investor buying the ETF. To the extent a non-transparent ETF might coax a hesitant portfolio manager into offering an ETF, the investing public can potentially benefit.

Past efforts, particularly the NextShares program put together by Eaton Vance, have had decidedly mixed results. The overriding opinion from recent industry conferences on the subject seems to tilt toward an increase in ETF filings and new offerings. Whether the new filings will result in significant new assets in those non-transparent ETFs remains to be seen.

3.) Race to the bottom on fees

For index ETFs, there may be additional gimmicky entrants to the space touting low or zero-fee products. A careful consumer will need to determine how the ETF will compensate its issuer, as there is no such thing as a free lunch. Portfolio transaction fees, which are included in the portfolio performance rather than the expense ratio, are one source. Revenues from lending portfolio securities can also generate fees.

ETFs will likely continue to increase as a percentage of most financial planners’ and wealth managers’ asset allocation models.

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Kip Meadows is the founder and CEO of Nottingham, a fund administration firm and white-label ETF issuer headquartered in Rocky Mount, N.C. Meadows has more than 30 years of experience servicing the fund management, administration, accounting and organization needs of clients nationwide.  

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Survey: Advisers’ Use of ETFs Continues to Rise

2016 Trends in Investing Survey ReportExchange-Traded Funds remain the most popular investment among financial advisers, according to results from a recent survey conducted by the Journal of Financial Planning and the FPA Research and Practice Institute™, a program of the Financial Planning Association®.

FPA recently released results of its 2016 Trends in Investing Survey, which showed that 83 percent of financial advisers surveyed are currently using or recommending the use of ETFs with their clients. When the survey was first conducted in 2006, only 40 percent of advisers surveyed said they’d used or recommended ETFs. That number has steadily grown over the years, up to 79 percent in 2014 and 81 percent in 2015.

That number may grow next year as 46 percent of respondents indicated they plan to increase their use or recommendation of ETFs with clients in the next 12 months.

ETFs are popular, according to respondents, because they have lower costs, are more tax efficient, have a higher trading flexibility and have increased transparency of holdings.

“The vast majority of ETFs are based on indexes, including those that focus on ‘smart beta,’ and I think the growth in popularity is to a significant degree reflective of the ongoing shift among financial planners toward more ‘passive’ approaches to investing client assets,” Dr. Dave Yeske, DBA, CFP®, Practitioner Editor of the Journal of Financial Planning, said in a news release. “Even planners who still use ‘active’ investment strategies will often start with a core portfolio built around index funds, increasingly in the form of ETFs.“

The 2016 Trends in Investing Survey also found that advisers continue to move away from variable annuities—39 percent of respondents are currently using/recommending variable annuities, versus 49 percent in 2012, which was down from 58 percent in both 2006 and 2008.

The survey was conducted online in April 2016 and was completed by 283 financial advisers. Among respondents, 98 percent are Certified Financial Planner™ (CFP®) professionals and 49 percent work as independent IARs/RIAs.

Read the full survey findings here. FPA members can read a more detailed overview of the findings in the June issue of the Journal of Financial Planning.