NOTE : The dividend is variable from one quarter to the next depending short lending income and obviously depends on the price of the shares at time of purchase. 

The Horizons Marijuana Life Sciences Index ETF (HMMJ) just paid its eleventh quarterly dividend of 27 cents on April 13, 2020. ... HMMJ actually makes its money by lending its shares to short sellers. Remember, when you sell a stock “short,” you are actually borrowing shares so that you can sell them at their current market price.

Investors should take a pragmatic approach and invest in the broader market through an exchange-traded fund (ETF) like Horizons Marijuana Life Sciences ETF (TSX:HMMJ). Here are three reasons why betting on this ETF is better than trying to pick winners or losers in the Canadian marijuana sector in 2020

Diversification

The most obvious benefit of investing in an ETF rather than stock picking is the way risk is mitigated through diversification. HMMJ owns a stake in the top 55 publicly listed marijuana stocks. The exposure to these holdings is weighted by market capitalization, which means the industry leaders account for the biggest portion of the overall portfolio. 

This level of diversification also means that the downside is limited when any one company fails. CannTrust, for example, was a larger part of the portfolio at the start of 2019 but now accounts for a smaller fraction since its stock price plummeted. Meanwhile, the larger stocks that performed relatively better offset the losers. 

This makes the HMMJ ETF a barometre for the entire industry. In other words, it’s a bet on consumer demand for marijuana rather than the success of any individual company. 

Steady income

Another reason HMMJ is an ideal bet is the fact that it offers a dividend to shareholders. Admittedly, it’s surprising that a portfolio of money-losing companies pays a dividend, yet that seems to be the case. In fact, the trailing dividend yield is impressively high at 12.4%. 

Here’s the secret: HMMJ isn’t paying a dividend from the profits of its underlying stocks. Instead, the ETF management company generates income by lending the stocks to short-sellers and daily traders. The interest earned on this short-selling activity is passed onto investors in the form of dividends. 

In other words, HMMJ benefits from the market collapse as well.  

Fair value (0.13% premium to net asset value)

Like any other ETF, HMMJ’s market price is usually misaligned with the net value of its underlying holdings. Generally, the ETF has traded at a discount to net asset value (NAV). However, at the moment it is trading nearly at par with NAV. 

In other words, the ETF is fairly valued.