On December 7th, 2018, Altria (NYSE: MO), one of the oldest and largest tobacco companies worldwide, announced their intent to purchase a $2.4 billion or 45% stake in Cannabis producer Cronos Group (Nasdaq: CRON) [1], thus opening the door for potentially greater investment in Cannabis by Big Tobacco.   This blockbuster deal came one year after Constellation Brands (NYSE: STZ) announced that it had agreed to take a 9.9% minority stake at that time in the world’s largest cannabis producer, Canopy Growth (NYSE: CGC). [2]

What we are witnessing is the evolution of the Cannabis Ecosystem, which continues to grow and touch an ever-expanding list of upstream and downstream industries that contribute to this complex investment theme.

Question: How can investors participate in this theme, so that they capture diversified, global exposure without losing focus on the heart of the ecosystem?

The ETFMG Alternative Harvest ETF

The ETFMG Alternative Harvest ETF (NYSE: MJ), is the first and largest US-listed investment vehicle to deliver investors globally diversified, equity exposure to the Cannabis Ecosystem.

Approximately 70% of the Prime Alternative Harvest Index, which MJ tracks, is made up of companies that are characterized as Primary Beneficiaries, or those that invest in, and derive most of their revenues from, the cannabis industry. (These companies are also called Pure Play companies.) Familiar pure play holdings in the MJ ETF include Canopy Growth (NYSE: CGC), Aurora Cannabis (NYSE: ACB), Tilray (Nasdaq: TLRY), and GW Pharmaceuticals (Nasdaq: GWPH).

The remaining (approximately) 30% of the Prime Alternative Harvest Index is comprised of Secondary Beneficiary companies, or those that benefit from the growth of the cannabis theme without “touching the plant”. Examples of these critical holdings in MJ are Scott’s Miracle Grow (NYSE: SMG), 22nd Century (NYSE: XXII), Altria (NYSE: MO), and Cara Therapeutics (Nasdaq: CARA).

Pure-play and secondary beneficiaries as defined by the Index Provider.

One common misconception about secondary beneficiary holdings is that, because their primary business lines are not cannabis-focused, they do not belong in a cannabis-themed index. In fact, MJ’s sixteen secondary beneficiary holdings are economically tied to the theme, whether it be via synthesis of CBD for medical use (Corbus), supplying materials for cannabis cultivation (Scotts Miracle Gro), or manufacturing cannabis delivery devices (GIMA). And as we see an increase in the demand for both medical and recreational cannabis, these companies that engage indirectly in the theme are well-positioned to grow along with those that “touch the plant”.

Advantages of Inclusion of Secondary Beneficiary Cannabis Companies

Investing in secondary beneficiary companies may offer the following advantages:

  • 1. Growth potential from investment in the cannabis industry
  • 2. Portfolio Diversification and Risk Management
  • 3. Dividend Income

1. Growth potential from investment in the cannabis industry

Secondary beneficiary companies have been investors in the explosive growth that we have witnessed in the cannabis space in recent years. These companies can be separated into three categories: Tobacco Companies, Biotech/pharmaceutical Companies, and Industrial and Consumer Suppliers.

  1. a. Tobacco companies. As a potential cultivator with a built-in infrastructure, big tobacco is waiting on the sidelines pending federal legalization of cannabis; however, tobacco companies have made a significant footprint in the e-cigarette and vapor business.

To quote researchers Rachel Ann Barry, Heikki Hiilamo and Stanton Glantz from their 2014 paper published in the Milbank Quarterly,

“Since at least the 1970s, tobacco companies have been interested in marijuana and marijuana legalization as both a potential and a rival product. This team from University of Helsinki, UC San Francisco, and the Center for Tobacco Control Research and Education uncovered previously secret tobacco industry topics to examine the long-standing interest in cannabis as public opinion has shifted towards legalization.” [3]

And to quote research from Prime Indexes, creators of the Prime Alternative Harvest Index:

“Marijuana represents a vast nascent market for big tobacco companies who are pumping millions of dollars into e-vaporizers, commonly known as e-cigarettes. Owing to prior expertise, the ability to source quality inputs, and operational synergies between the two industries, it would be prudent for big tobacco players to enter the marijuana industry.” [4]

The seven tobacco companies held by MJ all have active investments in cannabis research or delivery devices, such as vapor and e-cigarettes. And in the boldest statement by a tobacco company to date, in December 2018 Altria Corp (MO) announced a $2.4 Billion purchase of a 45% stake in Cronos Group (CRON). [5]

  1. b. Biotechnology and Pharmaceutical Companies.   MJ holdings Cara Therapeutics (Nasdaq: CARA), Corbus Pharmaceuticals (Nasdaq: CRBP), Arena Pharmaceuticals (Nasdaq: ARNA), and Zynerba (Nasdaq: ZYNE), are all engaged in research into synthetic cannabinoids, or CBD, that is not derived from Cannabis. While these companies do their research without “touching the plant”, their work is directly related to the benefits of CBD on a multitude of medical conditions. Here is a quote from an analyst on the site Market Screener in 2017:

“Cara Therapeutics Inc. is developing lead molecules that selectively modulate peripheral CB receptors without targeting CNS cannabinoid receptors…Cara’s CMO Dr. Joseph Stauffer said, “Cannabinoid Receptor Agonists like CR701 have the potential to provide improved pain relief for patients suffering from neuropathic pain.” [6]

  1. c. Industrial & Consumer Suppliers. These companies, including Schweitzer-Maudit (NYSE: SWM), GIMA TT S.p.A. (GIMA IM), and Scott’s Miracle-Gro (NYSE: SMG), all serve as vendors to the cannabis industry. The fastest growing of these in the cannabis-vendor space is Scott’s Miracle Grow, who, thanks to its Hawthorne division, has become a leading supplier of industrial growth materials to cannabis cultivators. From its fiscal Q2 2019 report, Scotts stated

“Sales for the Hawthorne segment increased 140 percent to $284.8 million…Revenue more than tripled at the company’s Hawthorne business, which supplies specialty fertilizers and growing equipment to marijuana growers, helped by the acquisition of a leading distributor. Sales climbed 21 percent when calculated as if the new business were owned last year…”. [7]

2. Portfolio Dividend Income

Unlike pure play Cannabis companies, which are restricted from distributing cash dividends, most of the secondary beneficiary companies in the Prime Alternative Harvest Index pay dividends. Tobacco companies have particularly high-yielding stocks.

One added benefit of holding these high-yield companies, is that this segment of the Prime Alternative Harvest Index will typically not earn significant securities lending revenue but have historically paid dividend yields, some significant. In a “pure play”-only strategy, once the maximum limit on securities lending is reached, there would be no additional opportunity to earn dividends in the fund.

3. Portfolio Diversification and Risk Management

Because they are in a diverse set of industries and trade in markets outside of North America, MJ’s secondary beneficiary holdings are a good source of diversification relative to a “pure-play only” strategy. As such, the overall portfolio risk is lowered significantly as well.

Using the Bloomberg Global Fundamental Equity risk model, looking at the one year standard deviation of return*, the ETFMG Alternative Harvest ETF (MJ) carries significantly lower risk than the pure play-only component of the MJ holdings (22.8% vs. 27.1%), and this is largely due to MJ’s secondary beneficiary constituent holdings.

Regarding investment returns, the brief performance history and the volatile nature of the overall cannabis theme make returns impossible to predict in the short term. With that said, recent changes in the regulatory environment appear to be positive for the cannabis industry. Looking at the chart below, the index-weighted basket of secondary beneficiary companies appears to mirror the performance of MJ at times, and it has helped to dampen volatility in MJ during some periods.

For MJ’s standardized performance history, please visit the fund’s page.



The ETFMG Alternative Harvest ETF, through its unique combination of primary and secondary beneficiary constituents, provides diversified, global, growth-oriented equity exposure to the Cannabis Ecosystem. The inclusion of companies that have an indirect relationship to the cannabis industry deliver an added layer of diversification while providing additional opportunities for income and growth not found in the “pure play” universe. We believe this constitutes a thoughtful approach in providing investors comprehensive exposure to the cannabis ecosystem.



  1. 1. https://www.fool.com/investing/2018/12/07/altria-makes-its-marijuana-move.aspx 

2. https://fortune.com/2017/10/30/constellation-brands-cannabis-canopy-growth/

3. https://www.theblincgroup.com/big-tobacco-eyes-the-lucrative-cannabis-industry/

4. https://www.etfmg.com/wp-content/uploads/2019/03/14-Prime-Indexes-Cannabis-Industry-Review-11102018.pdf

5. https://www.newcannabisventures.com/altria-buys-45-of-cronos-group-for-c2-4-billion-with-option-to-take-controlling-stake/

6. https://www.marketscreener.com/CARA-THERAPEUTICS-INC-15672075/news/Cara-Therapeutics-CBD-Market-Becomes-Major-Part-of-the-Cannabis-Industry-24479135/

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s statutory and summary prospectus, which is available on www.etfmg.com or may be obtained by calling 1-844-383-6477. Read the prospectus carefully before investing.

Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Narrowly focused investments typically exhibit higher volatility.

The possession and use of marijuana, even for medical purposes, is illegal under federal and certain states’ laws, which may negatively impact the value of the Fund’s investments. Use of marijuana is regulated by both the federal government and state governments, and state and federal laws regarding marijuana often conflict. Even in those states in which the use of marijuana has been legalized, its possession and use remains a violation of federal law. Federal law criminalizing the use of marijuana pre-empts state laws that legalizes its use for medicinal and recreational purposes. Cannabis companies and pharmaceutical companies may never be able to legally produce and sell products in the United States or other national or local jurisdictions.

The Fund’s investments will be concentrated in an industry or group of industries to the extent that the Index is so concentrated. In such event, the value of the Fund’s shares may rise and fall more than the value of shares of a fund that invests in securities of companies in a broader range of industries. The consumer staples sector may be affected by the permissibility of using various product components and production methods, marketing campaigns and other factors affecting consumer demand. Tobacco companies, in particular, may be adversely affected by new laws, regulations and litigation.

The fund is distributed by ETFMG Financial LLC.

Author Portrait
With more than 30 years’ experience in investment management, James brings a wealth of experience in global markets to ETFMG’s platform. Prior to joining ETFMG, James held Senior Portfolio Management roles at Deutsche Bank, Geode Capital Management, and SSgA, where he was a member of the team that in 1994 launched the first-ever ETF. James holds a Bachelor of Science degree in Applied Mathematics from the University of Massachusetts, Amherst.