These 'High' Flying Stocks Smoke The Magnificent Seven (2024)

The Magnificent Seven stocks are getting smoked by stocks coming from an unusual place: Cannabis.

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Three of the five top performing actively traded sector exchange traded funds this year so far, including ETFMG US Alternative Harvest ETF (MJUS) and AdvisorShares Pure US Cannabis ETF (MSOS) and AdvisorShares Pure Cannabis ETF (YOLO), are all plays on the marijuana industry, says Morningstar Direct.

The rally in cannabis stocks is swift and powerful. ETFMG US Alternative Harvest is up 22.4% this year. That even outperforms the 9.8% year-to-date gain by Roundhill Magnificent Seven ETF (MAGS). And the S&P 500 is only up roughly 4%. Even the VanEck Semiconductor ETF (SMH) is lagging weed this year, gaining just 14%.

What's going on with cannabis?

Big Factor Pushing Cannabis

Perhaps the biggest driver of cannabis is speculation the U.S. Drug Enforcement Agency (DEA) may reclassify the substance from Schedule I of the Controlled Substances Act to Schedule III, as reported by Bloomberg. That's an important distinction. It's also a continuation of efforts by President Biden to decriminalize the use of marijuana.

Schedule I substances are drugs with no currently approved medical use. They're viewed as having a high risk of abuse, such as heroin and LSD. On the other hand, Schedule III substances, like ketamine and codeine, are FDA-approved and readily available with a prescription. They're often legal when used as directed and not viewed as highly addictive.

If a reclassification happened, it would help the cannabis industry, although weed would remain illegal federally. There's no timeline on the decision. But cannabis ETF investors are jumping in now.

"Cannabis ETF performance has been driven by the potential reclassification from a Schedule I drug to a Schedule III drug," said Roxanna Islam of Vetta Fi. "Regulatory easing could lead to significant growth in the cannabis industry."

Another factor helping cannabis ETFs this year is that they've been such poor performers up until now. ETFMG US Alternative Harvest plunged 67% in 2022 and another 17.4% in 2023, Morningstar says. "While these ETFs are leading YTD performance, that comes after several years of weak performance," Islam said.

What's In The Cannabis ETFs?

What exactly are you buying, though, when you invest in a cannabis ETF? The $151 million-in-assets ETFMG US Alternative Harvest puts its portfolio in cannabis companies and real estate firms that get at least half their revenue from cannabis.

But it doesn't just own stock. The ETF owns financial swaps, too, and has dabbled with special purpose acquisition companies. Swaps are financial contracts where partners agree to trade cash flow or payments at set points in time. The ETF is also willing to sit on cash. Its largest position, at 36.6% of the portfolio, is a fund owning government debt. It also owns U.S. Treasuries. The ETF charges 0.76% annually.

Another option is the $902 million-in-assets AdvisorShares Pure US Cannabis ETF. The ETF is up 22.4% this year, too. Like ETFMG US Alternative Harvest ETF, AdvisorShares Pure US Cannabis takes many of its positions in marijuana companies in the form of swaps. Its largest position is a Curaleaf Holdings swap at 19% of the portfolio. The ETF charges 0.83% annually.

Marijuana is hot now. But this is definitely a speculative investment outside the mainstream. No marijuana companies are in the S&P 500 and many aren't based in the U.S. "Investors should still be cautious since this is an emerging industry," Islam said.

Weed Dominates Sectors This Year

Top actively traded sector ETFs