The cannabis industry has grown fast, and investors want exposure to “pot stocks.” But a common question I hear is: Are pot stocks primarily held in mutual funds? The short answer is no—most mutual funds avoid them due to legal and regulatory risks. However, some niche funds and ETFs do include cannabis stocks. Let’s explore why, how, and what alternatives exist.
Table of Contents
Understanding Pot Stocks and Mutual Funds
Before diving in, I need to clarify terms. Pot stocks are shares in companies involved in cannabis production, distribution, or ancillary services. Mutual funds pool money from investors to buy a diversified portfolio of stocks, bonds, or other assets.
Most traditional mutual funds (like those from Vanguard or Fidelity) avoid pot stocks because:
- Federal illegality – Cannabis remains a Schedule I drug under U.S. law, creating legal risks.
- Regulatory uncertainty – Banking restrictions and tax issues (IRS Section 280E) hurt profitability.
- Volatility – Cannabis stocks swing wildly, making them unsuitable for conservative funds.
The Math Behind Mutual Fund Holdings
A mutual fund’s portfolio weight for a given stock is:
w_i = \frac{n_i \times p_i}{\sum_{j=1}^{N} n_j \times p_j}Where:
- w_i = weight of stock i in the fund
- n_i = number of shares held
- p_i = price per share
- N = total number of stocks in the fund
For pot stocks, w_i is often zero in mainstream funds.
Which Funds Do Hold Pot Stocks?
While most mutual funds avoid cannabis, some exceptions exist:
1. Sector-Specific ETFs and Mutual Funds
A few funds specialize in cannabis, such as:
| Fund Name | Ticker | Top Holdings | Expense Ratio |
|---|---|---|---|
| ETFMG Alternative Harvest ETF | MJ | Tilray, Canopy Growth | 0.75% |
| AdvisorShares Pure Cannabis ETF | YOLO | Curaleaf, Green Thumb | 0.74% |
| Cambria Cannabis ETF | TOKE | Trulieve, Innovative Industrial Properties | 0.42% |
These are exchange-traded funds (ETFs), not traditional mutual funds, but they function similarly.
2. Thematic and ESG Funds
Some socially responsible funds include cannabis stocks if they meet ESG (Environmental, Social, Governance) criteria. Example:
- Global X Cannabis ETF (POTX) – Focuses on legal cannabis companies.
- Amplify Seymour Cannabis ETF (CNBS) – Targets U.S. and Canadian firms.
3. Canadian Mutual Funds
Since Canada legalized cannabis federally, some Canadian mutual funds hold pot stocks. U.S. investors can access them, but currency and tax implications apply.
Why Most Mutual Funds Avoid Pot Stocks
1. Legal and Compliance Risks
The SEC and FINRA impose strict rules on mutual funds. Holding federally illegal assets could trigger regulatory action.
2. Liquidity Concerns
Many cannabis stocks trade on the OTC market (not NYSE/Nasdaq), making them illiquid. Mutual funds need daily liquidity to handle redemptions.
3. Performance Volatility
Cannabis stocks can swing ±20% in a week. Most mutual funds prioritize stability.
Example: Comparing Cannabis vs. S&P 500 Volatility
Using standard deviation (\sigma) as a risk measure:
\sigma_{MJ} = 38\% \quad \text{vs.} \quad \sigma_{SPY} = 15\%The MJ ETF (cannabis) is 2.5x more volatile than the S&P 500.
Alternatives to Mutual Funds for Cannabis Exposure
If mutual funds rarely hold pot stocks, how can investors get exposure?
1. Direct Stock Purchases
Buying shares of Curaleaf (CURLF), Green Thumb (GTBIF), or Tilray (TLRY) is the simplest method.
2. Cannabis ETFs
ETFs like MJ, YOLO, or POTX offer diversification without picking individual stocks.
3. Private Equity and REITs
Some investors access cannabis through:
- Private equity funds (for accredited investors)
- Real Estate Investment Trusts (REITs) like Innovative Industrial Properties (IIPR)
The Future: Will More Mutual Funds Add Pot Stocks?
If the U.S. federally legalizes cannabis, mainstream mutual funds may start including pot stocks. Until then, expect limited adoption.
Key Legislative Developments to Watch:
- SAFE Banking Act – Would ease banking restrictions.
- Marijuana Opportunity Reinvestment and Expungement (MORE) Act – Federal decriminalization.
Final Thoughts
Pot stocks are not primarily in mutual funds due to legal and volatility risks. However, specialized ETFs and direct stock purchases offer alternative exposure. If federal laws change, we may see broader adoption. For now, investors must navigate this space carefully.
