A cloud looms over the newly traded marijuana ETFs, and it’s something—or someone—that most investors don’t know anything about. Custodians are the independent third parties, usually banks, whose sole task is to hold securities for an exchange-traded fund. Though they often go unseen and unnoticed, custodians play a critical role in the launch and is It Too Late To Invest In Mjx of any fund. Without custodians, there can be no ETFs. But when it comes to marijuana ETFs, custodians remain wary, at best.
Until recently, most big banks refused to shoulder the reputational and possible legal risk of having their brands associated with a cannabis fund. Nevermind Attorney General Jeff Sessions’ anti-marijuana crusade. Holding stocks involved with a drug still outlawed by the U. S government could potentially run a bank afoul of federal banking laws, maybe even cost them their FDIC insurance or banking license. It was perceived as simply too wide a river to cross. Yet now there are two marijuana ETFs trading in the U.
MJX, in particular, has caught investors’ attention: Though the ETF only began trading in its current form on Dec. Despite MJX’s overnight success, custodian fears haven’t been laid to rest—not even close, according to sources. The possibility a custodian might yank support of MJX, or any marijuana ETF, is being discussed throughout the ETF industry. This article results from conversations with more than a dozen knowledgeable industry sources, many of whom spoke to ETF. After decades of demonization, the tide is finally turning for marijuana. 10 billion for 2017, will likely quadruple over the next decade.
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Medical marijuana has already been legalized in 29 states, while recreational marijuana is now legal in eight, including California as of the start of this year. Yet marijuana remains illegal at the federal level. MMDA and ecstasy as drugs with a high potential for abuse and no approved medical usage. There are some big dominoes falling,” said Eric Balchunas, senior ETF analyst for Bloomberg.
A major wave could sweep the nation soon, because there’s a lot of money here. 713 million in assets in just over nine months of trading, though MJX’s rapid asset gathering could soon eclipse that figure. What’s remarkable about HMMJ, says Balchunas, is how sticky its assets are. Shortly after the ETF launched, HMMJ’s price plummeted over several months. For a larger view, please click on the image above. So if there was pent-up demand from investors, why did it take so long to bring marijuana ETFs to market, and why have so many filings languished without approval?
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It all comes back to custodians. Custodians tend to be large, well-established banks, such as BMO, BNY Mellon and U. Federally licensed and chartered, they’re staid, trusted institutions with the resources on hand to buy and sell large quantities of securities as needed. As such, these banks are reticent to run afoul of federal laws, which prohibit the production and sale of marijuana, and which classify any pot-related financial transaction as money laundering. Obama-era guidelines, however, introduced some flexibility into the system, granting states the ability to legalize the growing and selling of pot within their own borders. It also permitted state and community banks and credit unions to do business with marijuana companies, and discouraged federal prosecution of any cannabis company that was following state law. Attorney General Jeff Sessions announced plans to rescind these 2014 guidelines, stating that the federal complete marijuana ban would once more take priority over individual state law.
This has introduced uncertainty into the future of the legal marijuana industry, though it is too early to tell exactly what impact it will have. Until recently, few custodian banks showed any interest in wading into this potential legal minefield. One high-level ETF executive, who asked not to be named, had approached several custodians about launching a marijuana ETF, including SEI, BNY Mellon, BMO and U. In each instance, initial interest over the fund was replaced weeks later with a hard no from senior compliance and risk officers or legal departments. Sometimes fund servicers were even reprimanded for bringing the proposal to their higher-ups. Every single time a fund-servicing person expressed excitement, every single time we eventually were told no, that it was against company policy,” said the executive.
It’s not that the underlying marijuana stocks themselves were verboten, since many custodians already hold these for other contexts. Instead, the problem is that custodians would be holding these stocks specifically for a marijuana ETF. When a federally chartered, licensed and insured bank declares that the primary reason it is holding marijuana companies is to provide exposure to a federally illegal substance, the bank could be jeopardizing its entire business. Any bank covered by FDIC runs the risk of taking funds deemed tainted by the U. CSA and denied their FDIC insurance,” said specialized ETF consultant Bob Tull, who has helped launch nearly 400 ETFs. They might also lose their banking license. There’s no client big enough to run that risk.