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Horizons ETFs Management (TSE:HMMJ) SVP on New 2x Daily Bull ETF (TSE:HMJU) & Inverse ETF (TSE:HMJI) - YouTube
Channel: Midas Letter
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Narrator: Introducing the world’s first
marijuana-focused ETF: Horizons Marijuana
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Life Sciences Index ETF: HMMJ.
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Diversified exposure to companies in the rapidly
growing cannabis industry.
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HMMJ offers easy access to a new frontier
of investing.
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Horizons ETFs.
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James West: Mark Noble joins me now from Horizons
ETF.
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Mark, welcome back.
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Mark Noble: Hey, great to be here.
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James West: Mark, what’s new with Horizons
ETFs?
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You’ve launched another couple of new ones;
one’s doubly leveraged to the upside, one
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single times leverage to the downside.
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How do those work?
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Mark Noble: Okay, so we’ve had a lot of
demand from HMMJ users, holders, wanting to
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get exposure either on the leverage-long side,
or in some ways, want to short it.
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So what we’ve done is, we’ve launched
two new ETFs.
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One, HMJU, provides two times the exposure
of an underlying North American marijuana
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index, and the marijuana index is sort of
comprised of the large LPs, so all the, you
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know, the household names; not small caps.
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And then we have a minus one index ETF which
is ticker symbol HMJI.
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So you’ve got HMMJ right in the middle long
exposure, HMJU, double exposure, and HMJI
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for inverse exposure.
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And that provides minus one times exposure
to the market.
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So if that index goes up during the day 1
percent, the minus one would lose percent
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and the double one would make 2 percent.
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And the inverse would happen; if the index
was to decline 1 percent, you would make 1
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percent on the inverse and you would lose
2 percent on the double long.
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James West: Oh, okay.
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That’s relatively easy to understand; I
could probably get it if you told me that
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about three more times.
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Mark Noble: [laughter]
James West: But no, I get it.
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So does that make the – is, like, on the
short side, for example, I’m familiar with
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the natural gas -
Mark Noble: Right, very similar idea.
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James West: Yeah.
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The 3X to the downside can wipe you out in
a heartbeat, and whereas, you know – on
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either one, you can really be, you can make
an error in judgment and find yourself.
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Mark Noble: Right.
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We’re not doing three times, so it’s two
times on the leveraged marijuana, the upside.
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There’s obviously a lot of volatility, so
today, for example, we just launched them
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today; the market was up a certain amount,
and I believe the double long was up, you
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know, twice that.
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But if you look at the short side, that’s
where we’ve had a lot of interest.
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The reason being is, you know, I’ve come
on here before and talked – there’s a
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lot of tension between I would call Wall Street
and Main Street, and the marijuana equity
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business, the bulwark of support for it is
actually self-directed investors.
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It’s retail investors.
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If we go and we look at Wall Street analysts’
reports, like hedge funds, there’s a lot
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of short interest on marijuana stocks, and
in fact, the borrow costs on individual marijuana
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stocks are absolutely astronomical.
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They’re at their lows right now, oh, probably
over the last six or seven months, but even
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a stock like Tilray is like 35 percent per
annum to borrow.
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That means that if you held that short position
for a year, you have to make 35 percent just
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to break even.
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James West: Right.
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Mark Noble: We’ve seen that go up to 100
percent at some points in time.
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Companies like Organigram, around 22 percent;
you know, Canopy is probably the lowest at
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about 6 percent.
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Individual investors have a really hard time
taking a short position on the market, because
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they can’t really, you know, they have to
use margin.
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They can have a margin call.
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So what this ETF allows you to do, particularly
HMJI, is, it allows you to have a flexible
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way to short the market.
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Even if you’re long over the long term,
there may be periods of dislocation, you want
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to trade; this allows you to take a short
position intra-day, buy it throughout the
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day, and you can get that exposure.
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The one caveat, though, is unlike any other
ETF in Canada, this has a borrow cost associated
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with it, because our counter-party, in order
to provide short exposure, they’re going
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to actually have to short those stocks in
their portfolio.
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So the current borrow cost on this ETF is
about 18 percent, and it could be as high
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as 30 percent.
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So again, back to your original point, these
are something that you’ve got to be looking
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at from a tactical focus.
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So if you’re looking at your technicals
and you have a high conviction that there’s
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a movement happening, you can use these ETFs
to magnify your returns or take advantage
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of a pullback in the market.
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Just recognize that there’s quite a bit
of a cost to that, are reflected in the borrow
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cost that gets transferred over.
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James West: So your upside is going to be
whatever the move is, ex of 18 percent per
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annum?
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Mark Noble: So that’s a great question.
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No.
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So on the upside, there is no borrow cost,
so it’s just two times what the index would
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be.
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However, there’s, you know, a leverage cost,
a management fee of about 1.45 percent.
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James West: I mean, the upside in investing
in the minus one.
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Mark Noble: Yes, sorry, yeah.
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James West: Okay.
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So I need, so if I’m looking for a intra-day
move, let’s say that I have a little birdie
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whispered in my ear and I’m fully expecting
Canopy to lose $5 in the next two days.
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So I’m going to put $100,000 down on the
short inverse ETF, and I’m going to, my
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plan is to exit the position at the week no
matter what happened, based on this expectation;
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unless my stop losses kick in and I get stopped
out.
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So does that mean that, even for two days
or three days that I hold it, it’s going
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to be 18 percent for the entire trade?
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Mark Noble: No.
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It’s 18 percent per annum.
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James West: Okay.
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So it’s divided by…
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Mark Noble: So it would be divided by 252
trading days, right?
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James West: 252, okay.
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Mark Noble: Well, generally that would be
the math, but what I want to highlight here
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is, you know, if you have a view that Canopy
is going to lose 5 percent over six months,
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you wouldn’t buy HMJI or the sector, because
the roll costs of that particular short could
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really hurt you.
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But to your example, that’s exactly how
we anticipate investors will try to use it,
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is tactically.
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I’ve had a view from, you know, three to
four days, a week, maybe a daily – we provide
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exposure daily, so the investment objective
is to provide daily exposure.
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But I have a view that one to three days that
this move’s going to happen, I can get in
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and out of this position using the ETF to
take advantage of that tactical move, and
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then I don’t have to set up a margin account,
I don’t have to worry about borrow costs
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and prime brokerages.
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That’s all a one-stop solution for you to
take a short position on the market.
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On the other side, on the two times, the exact
same thing.
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If you think that, you know, Canopy is going
to shoot the lights out on its next earnings,
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and I know there seems to be a buildup of
bullish activity on there, you know, you could
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take a two times position and try to capture
an upside movement on the market going in
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for a three to four day period.
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But the ETFs themselves, their goal is for
that day.
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So for that day, they will deliver 2 times
the underlying index; beyond that, the exposure
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resets so that you have it taking that resetted
position and then providing two times.
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The reason we do that is so that we limit
the investment exposure loss to what you invested.
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You’re never going to lose more than what
you invested.
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Anyone who’s shorted marijuana stocks in
the last year knows that you can lose a lot
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more than you invested, especially if you
get caught with a margin call, that can take
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you out of the position entirely.
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And the same thing with leverage: if I borrow,
my borrow costs can exceed that.
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So there’s been a lot of excitement about
these ETFs, because they’re taking that
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unlimited risk of going long or short out
of the marketplace, and allowing you to have
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a liquid vehicle for which to get those movements.
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James West: So if you would have gone short
Canopy on August 13, 2018, you would have
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had your ass handed to you, if you were actually
short.
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But if you were in the inverse -
Mark Noble: Double long.
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James West: If you were in the inverse, it
would have reset and you would have been like,
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okay, it’s time to get the hell out of Dodge,
but you wouldn’t have lost your shirt.
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Mark Noble: Correct.
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James West: Theoretically.
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Mark Noble: You’re exactly.
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James West: Okay, that’s interesting.
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So what are the, what are the disadvantages
of investing in, like, the double long?
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I mean, like, it seems to me like it’s a
zero-loss proposition.
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If you think that the stock market – if
you think the index is going higher based
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on, like, a bunch of great earnings, then
why wouldn’t you just load up the truck
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on that?
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Mark Noble: Because the underlying is volatile,
right?
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So the reason that people like to trade marijuana
stocks, like, when we look at HMMJ, we’re
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doing anywhere from 1 million to 5 million
units a day.
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And a lot of that is actually short-term money
coming in and out, and that’s because the
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volatility of marijuana stocks, I believe
last year it was somewhere around 40 percent.
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Like, there was huge swings, right?
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If you remember going into August of last
year, you know, there was that crescent; then
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we had the huge move-up, and then we had Q4,
you lost another 40 percent, and then you’re
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up, you know, 80 percent on some of these
stocks year-to-date.
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So yes, using double leverage can allow you
to capture those returns, but on the downside,
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if you’re 2 times leveraged on a big, 20
or 30 percent move on the underlying, well,
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now you’ve lost 40 to 60 percent.
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James West: Right.
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Mark Noble: So there’s no free lunch in
investing, and so if you take a leveraged
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position, your returns are going to be magnified,
but also, your risk is, as well.
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James West: Sure.
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So the, the, both the inverse 1X and the 2X
are, the benchmark is the HMMJ itself?
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Mark Noble: It isn’t, technically.
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So it is a different index; it’s called
the North American Market on Close Index.
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James West: Okay…
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Mark Noble: But for all intents and purposes,
the exposure is essentially the same; so if
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you were to put them in there, you’ll see
the performance of the index is very close
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to HMMJ.
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What we don’t have the HMMJ does, HMMJ has
over 50 stocks, and there’s a lot of smaller-cap
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names in there, sort of in the, I would say,
the $75 million to $500 million range.
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None of those smaller names are in this particular
index; in order for us to have a derivatives-based
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structure, a synthetic structure to deliver
leverage, we need to have liquid names.
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So it’s a smaller portfolio of the larger
names, but like I said, it’s the names you’re
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widely following.
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I mean, the biggest holdings are Aurora, Canopy,
Tilray, Cronos….
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James West: Right.
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Mark Noble: Organigram.
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James West: So in these multiplier ETF strategies,
is it important for the investor to understand
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exactly the total effect of the individual
constituents likely in terms of the full market
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reaction to any given piece of news?
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Mark Noble: I mean, it’s important to understand
that if you’re betting it on, you know,
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if you think Canopy is an outlier and Canopy
is going to do one thing and the sector is
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going to do something else, then you have
to keep that in mind.
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But generally what we’ve started to see
is that the large names have what I call a
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high degree of beta to the underlying market.
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So a big movement in Canopy is going to create
a net rising tide effect across the board.
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James West: Sure.
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Mark Noble: So generally, your technicals
on most of the big Canadian LPs are going
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to suggest that things move in tandem.
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So to your question, you know, yes, you do
need to be aware that if you’re looking
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at individual stock news, you want to be playing
that individual stock; but understand that
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big news on an individual stock, particularly
the big names, is going to probably impact
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the sector.
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So there will be a correlation, and we want
to provide sector exposure, because if you
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go double long the sector and the sector is
positive, but then you get a company, you
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know, failing on earnings miserably, which
we’ve seen a couple of them do, you don’t
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want to be caught offside on a leveraged position
on that one side.
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So the diversification of going long the sector,
actually reduces that single stock risk which
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provides even more volatility.
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James West: Yeah.
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Interesting.
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Well, I’m going to take a couple of schwacks
at it, just because that’s how I learn.
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Learning the hard way, understanding through
losing and/or winning.
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Mark Noble: Well, read the prospectus, and
read a lot of the disclaimer language there.
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These are structurally complex.
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They do what they’re designed to do, but
you know, an education goes a long way.
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James West: Okay.
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Mark Noble from Horizons ETFs, thank you very
much for your input.
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As usual, very enlightening; just a little
bit confusing this time.
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Mark Noble: A little bit confusing, okay.
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James West: Any other fool would be able to
understand it, it’s just that I’m a particularly
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big fool.
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Thanks for joining me today, Mark.
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Mark Noble: My pleasure.
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