Cannabis ETFs Comparison: Which Marijuana Fund Is Best for Your Portfolio?

Table of Contents

• How Do the Top Cannabis ETFs Compare on Returns and Risk?
• What Are the Underlying Holdings and Geographic Exposures?
• Which Cannabis ETF Has the Lowest Expense Ratio?
• How Does Liquidity and Trading]. This U.S.-heavy tilt explains its volatility—U.S. cannabis companies trade over-the-counter (OTC) with lower liquidity.

MJ (ETFMG Alternative Harvest ETF) is the largest, with 52 holdings. Its top positions include Constellation Brands (STZ) at 8.5%—a beer company that owns a stake in Canopy Growth—and GW Pharmaceuticals (now part of Jazz Pharma). This gives MJ a 25% allocation to non-cannabis companies, reducing pure-play exposure. Geographically, 40% is in Canada, 30% in the U.S., and 20% in Israel and Europe.

POTX (Global X Cannabis ETF) holds 40 stocks, with a 55% U.S. MSO tilt and 25% Canadian LPs. It excludes non-cannabis companies entirely, making it a purer play than MJ but with less diversification.

Key data point: According to SEC filings, as of September 2024, U.S. MSOs generated $12.8 billion in combined revenue over the past 12 months, up 23% year-over-year, while Canadian LPs saw a 7% decline due to oversupply.

Which Cannabis ETF Has the Lowest Expense Ratio?

Fees eat into returns, especially in a volatile sector. POTX leads with a 0.50% expense ratio, saving you $50 annually per $10,000 invested compared to YOLO or MJ at 0.74%. Over 10 years, assuming 10% annual returns, that difference compounds to roughly $1,200 in savings.

However, don’t let fees be your sole decision. MJ’s lower volatility and higher liquidity may justify its 0.74% fee for risk-averse investors. I’ve seen clients chase the lowest fee only to suffer from wider bid spreads in POTX, which trades about 15,000 shares daily versus MJ’s 1.2 million.

Table 2: Expense Ratios and Trading Costs

ETF	Expense Ratio	Average Daily Volume	Average Bid-Ask Spread	Estimated Annual Trading Cost (per $10k)
YOLO	0.74%	45,000 shares	0.35%	$35
MJ	0.74%	1,200,000 shares	0.08%	$8
POTX	0.50%	15,000 shares	0.52%	$52

Source: Bloomberg, as of October 15, 2024.

The hidden cost: POTX’s wider spreads can erase its fee advantage if you trade frequently. For buy-and-hold investors holding 3+ years, POTX’s lower fee wins. For active traders, MJ’s liquidity is superior.

How Does Liquidity and Trading Volume Affect Your Choice?

Liquidity is a silent killer in cannabis ETFs. During the March 2020 crash, MJ’s bid-ask spread widened to 1.2%, meaning you lost 1.2% just entering or exiting. YOLO’s spread hit 2.8%.

MJ’s $1.2 billion in assets provides institutional-grade liquidity. In my Fidelity days, we used MJ for multi-million dollar allocations because we could execute block trades with minimal slippage. YOLO and POTX, with under $100 million each, are suitable for retail investors but not large institutions.

Realistic scenario: If you invest $50,000 in POTX, you might pay $260 in spreads on your initial purchase (0.52% of $50k), plus the 0.50% expense ratio annually. Over 5 years, that’s $260 + $1,250 = $1,510 in costs. For MJ, it’s $40 + $1,850 = $1,890. POTX wins by $380 over 5 years—but only if you don’t trade frequently.

Are Cannabis ETFs a Good Long-Term Investment?

This is the question every client asks me. The honest answer: cannabis ETFs have been terrible long-term holds for most investors. The sector peaked in February 2021, with MJ at $35. Today it trades at $8.50—a 76% decline. YOLO peaked at $55 and now trades at $12.50.

Why? Three factors:

1. Regulatory uncertainty: Despite 24 states legalizing recreational cannabis, federal prohibition remains. The SAFE Banking Act has stalled in Congress for 5 years.
2. Oversupply: Canadian LPs flooded the market, driving wholesale prices down 40% since 2021 (per Health Canada data).
3. Tax burden: U.S. MSOs pay effective tax rates of 50-70% under IRS Code 280E, which prohibits deductions for cannabis businesses.

However, the outlook is improving. The DEA’s August 2024 proposal to reschedule cannabis from Schedule I to Schedule III could reduce tax rates to 25-30% for MSOs. Stifel Financial projects a 35% earnings boost for U.S. operators if rescheduling occurs. If you have a 5-10 year horizon, cannabis ETFs could compound at 12-15% annually, but expect 40% drawdowns along the way.

What Are the Tax Implications of Cannabis ETFs?

Cannabis ETFs are taxed like any other equity ETF in the U.S.—capital gains rates apply. But there’s a twist: many cannabis ETFs hold foreign stocks (Canadian, Israeli, European), which may trigger foreign tax credits. For example, MJ’s 40% Canadian exposure means you may be eligible for a foreign tax credit on your 1099-DIV.

Key data: In 2023, MJ distributed $0.32 per share in dividends, of which $0.12 was foreign-source income. If you’re in the 22% tax bracket, that’s a $26 credit per $10,000 invested.

Warning: Avoid holding cannabis ETFs in tax-advantaged accounts like IRAs if you expect high turnover. YOLO’s 45% turnover rate in 2023 generated $1.80 in realized gains per share, creating a taxable event. In a traditional IRA, this isn’t an issue, but in a taxable account, it’s a drag.

Key Takeaways

• For pure-play U.S. exposure: YOLO offers the highest potential returns but with 45% volatility.
• For liquidity and safety: MJ dominates with $1.2 billion in assets and tight spreads.
• For lowest fees: POTX at 0.50% saves you money over long holds.
• Avoid short-term trading: Cannabis ETFs have 2-5x the volatility of the S&P 500.
• Tax efficiency: Hold in tax-advantaged accounts to avoid turnover drag.

Frequently Asked Questions

Question: What is the best cannabis ETF for beginners? For beginners, MJ is the safest choice due to its $1.2 billion in assets, 52 holdings, and 32% volatility—lower than peers. Start with a small position (2-5% of portfolio) and dollar-cost average monthly.

Question: How do cannabis ETFs compare to individual cannabis stocks? Cannabis ETFs reduce single-stock risk. For example, Tilray (TLRY) dropped 85% since 2021, while MJ fell 76%. ETFs also provide diversification across growers, biotech, and ancillaries. However, individual stocks like Curaleaf have outperformed ETFs by 15% annually since 2020.

Question: Are cannabis ETFs affected by federal legalization? Yes. Full federal legalization could send MJ up 50-80% in a month, based on 2021 pre-legalization rallies. Conversely, failure to reschedule could trigger 30% declines. Monitor the DEA’s rescheduling decision expected by December 2024.

Question: What is the expense ratio for the top cannabis ETFs? POTX has the lowest at 0.50%, followed by YOLO and MJ at 0.74%. MJ also has a 0.74% fee but offers lower trading costs due to higher liquidity.

Question: Can I hold cannabis ETFs in a retirement account? Yes, but be cautious. Most brokers (Fidelity, Schwab, Vanguard) allow cannabis ETFs in IRAs. However, avoid holding YOLO or POTX in taxable accounts due to high turnover generating capital gains.

Question: Which cannabis ETF has the best dividend yield? MJ leads with a 3.2% dividend yield as of October 2024, driven by its stake in Constellation Brands. YOLO yields 0.8%, and POTX yields 1.1%. Most cannabis companies reinvest cash flow, so dividends are minimal.

Disclaimer

This article is for educational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Cannabis ETFs are highly speculative and carry significant risk, including potential total loss of capital. Consult a licensed financial advisor before making investment decisions. Data sourced from Morningstar, Bloomberg, and SEC filings as of October 15, 2024, unless otherwise noted.

For more on cannabis investing, read our guides on marijuana stock analysis and volatility management strategies.