U.S. investors may have an even more difficult time than they are used to when it comes to investing in cannabis stocks, according to a recent report by Bloomberg. The reason is that ETFMG Alternative Harvest ETF (MJ), one of the largest cannabis exchange-traded funds (ETFs), has run into a technical issue involving custodians. For investors in the U.S. who are interested in reaping the growth potential of the legal cannabis industry, this presents a significant hurdle: cannabis stocks and related instruments have already been seen as walking a fairly fine line when it comes to issues of regulation.

Details of the Issue

Two of the primary banks facilitating large purchases of MJ, Bank of America and Credit Suisse, both ceased accepting orders requiring that they create new shares in the fund, according to the report. The reason for this was that MJ ceased to use U.S. Bancorp as its custodian; with one source citing operational and settlement risks as the reason.

As of Wednesday afternoon, September 26, ETF Managers Group head Sam Masucci, whose company runs MJ, indicated that at least four of the nine authorized participants working with his firm have created shares in MJ since the change of custody. Bloomberg added that more than $50 million has flowed into MJ since September 14, suggesting that the issue may have been less of a total barrier and more of a speed bump.


Nonetheless, the issue remains a significant one for the $660 million ETF. For a fund like MJ to excel, it relies on major banks like Credit Suisse or Bank of America in order to help direct assets its way. These banks are crucial in protecting the price of the fund from moving too far away from its inherent value. There's no question that the process of efficient trading is facing the threat of some degree of compromise given the lack of participation of the other authorized participants.

This is also not the first time this year that MJ has faced pressure. ETFMG quickly changed the fund's strategy from Latin American real estate to marijuana companies late last year, drumming up interest in the process. However, the sudden shift prompted questions about whether or not U.S. Bancorp would remain in its position as custodian.

The Future of MJ

Wedbush Securities has been appointed fund custodian going forward. At the same time, ETFMG appointed Computershare Trust Co. as transfer agent and named itself as fund administrator; U.S. Bancorp had done all three of those jobs before that. While this fills those vacancies, Bloomberg acknowledges that none of these companies has a reputation for taking on these roles in the ETF space. The future may remain turbulent as a result, even as pot stocks make notable gains.