Green is the New Black

Given the impressive growth of its market – worldwide spending on Cannabis reached 9.5 billion USD in 2017 and is expected to grow to 32 billion USD by 2022 – it is no wonder why so many traders have been flocking into Cannabis Stocks and Indices over the last year. While this market offers tremendous opportunities for sensible traders, it is important to understand both the drivers of this growth, as well as the different ways to access a balanced exposure to this trading niche.

The 4 factors driving cannabis’ market growth

Aside from the inherent hype that surrounds the Cannabis industry, there are four key factors that many experts agree are fuelling the recently-experienced growth. These are: Technology, Product Diversity, International Expansion and Displacement of Black Markets.

Factor 1: Technology

The industry’s long-term sustainability lies primarily behind medical products. From production companies applying engineering to maximize the strength of certain components, to biotechnology companies increasing investments in research and trials and becoming more experienced, the conditions are set for a growth in the number of medical applications of Cannabis. Cannabinoids have been proven to have a very positive impact in the treatment of a wide range of ailments. Researchers are exploring its potential to tackle such enduring problems as epilepsy, Parkinson’s disease, anxiety, depression and even breast cancer.

Factor 2: Product Diversity

Cannabis is a rich source of CBD or Cannabidiol, a non-psychoactive compound exhibiting a myriad of health and medicinal benefits without inducing the feeling of being “high” or any addictive behaviours. As this component can be used in the production of many medical and non-medical products, growers have been engineering a large variety of strains, to optimize certain components and increase its applicability across industries and products.

Factor 3: International Expansion

Today, Cannabis recreational consumption and, most importantly, production has been legalized in several countries. This can be evidenced by the fact that large companies like Aurora Cannabis, Tilray and Canopy Growth are now active in many countries. This regulatory wave is expected to continue, with countries like Luxembourg already announcing liberalisation of the Cannabis market over the upcoming years.

Factor 4: Displacement of Black Markets

As more jurisdictions loosen their regulations and some cases legalize its recreational usage, experts concur that a significant chunk of the black market revenues will be absorbed by large corporations, like those present in the main Cannabis Stock Indexes.

High returns vs high volatility

A wide media coverage, as well as a large number of mergers and acquisitions in the sector – expected to continue due to consolidation and the entry of new companies in the market – have translated into a high volatility for some stocks during recent years.

When comparing the Cannabis Stock Index against the USA 500, it is evident that higher returns have come at the expense of higher volatility, something which traders need to keep in mind.

An indexed approach to Cannabis Trading helps to diversify away from company-specific risks. It is important however to ensure that the provider has applied a “pure exposure” methodology to index construction. Indices such as BITA’s Cannabis Stock Index, offered through Plus500’s online trading platform, are built with this framework in mind, ensuring that all index components derive a large majority of their revenues and earnings from core cannabis businesses.