A marijuana-themed exchange traded fund — touted as the world's first — launched on Wednesday morning on the Toronto Stock Exchange, giving investors a new way to bet on legal marijuana stocks.

Horizons Medical Marijuana Life Sciences ETF, managed by the Canadian branch of Horizons ETFs Management, bundles 14 stocks related to the marijuana industry and makes them available as a single security.

Ten of the 14 stocks currently held in the fund are Canadian-based companies, most of which are licensed producers of legal medical marijuana (one of those, International Cannabis Corp., grows legal marijuana in Uruguay). Three are pharmaceutical companies based outside of Canada. U.S. fertilizer giant Scotts Miracle-Gro is also in the fund.

The passive exchange traded fund tracks most of the companies listed in the North American Medical Marijuana Index compiled by German indexing firm Solactive. The fund will be rebalanced quarterly, with no stock to be worth more than 10 per cent of the overall fund. The management fee is 0.75 per cent.

'Expectations of future growth'

The fund is targeted at the "do-it-yourself investor," said Steve Hawkins, president and co-CEO of Horizons ETFs Canada.

Hawkins described the potential investor as "somebody who's interested investing into the marijuana industry [and] believes that there's a growth story with the marijuana industry." But that investor, he suggested, might also want to avoid the volatility that has been associated with Canadian marijuana stocks.

"If you're invested in one company, you're taking a lot more individual risk from an investor perspective," said Hawkins, citing recent lawsuits against Canadian medical marijuana producers over the use of prohibited pesticides.

Hawkins did acknowledge some inherent risks in investing in the marijuana industry as a whole.

"It's a very early stage sector," he said. "Valuations are very high, for sure. A lot of it is based on the expectations of future growth."

Those growth expectations are largely predicated upon the eventual legalization of recreational marijuana in Canada, which could come as early as July 2018.

Steve Hawkins, president and co-CEO, Horizons ETFs, on the pending launch of the world's first pot exchange-traded fund 5:18

When recreational legalization happens, said Hawkins, some of the stocks in the Horizons ETF are poised to benefit. Many of the legal medical marijuana producers in Canada are building up capacity to sell into the recreational market once they can.

"The index and the ETF itself will dynamically change as the regulations that govern this industry change," Hawkins said.

Horizons Medical Marijuana Life Sciences ETF opened at $10.11 on the Toronto Stock Exchange on Wednesday, and was trading at $10.24 as of noon ET.

'Classic speculation'

"What's good about an ETF like this is, it does get you a lot of the pure pot stocks, which can be very risky and volatile," said Eric Balchunas, an ETF analyst with Bloomberg Intelligence.

"What the ETF serves up is a way to dampen that single stock risk," said Balchunas. "So instead of an investor saying, 'Hey, let me try to pick out one of these pot stocks that should benefit from the overall legalization and recreational use of pot,' now you get [a number of] stocks in a basket.

"And so if one of them blows up, the ETF doesn't really feel it that much. It's like a little dent, as opposed to all your money gone."

That said, Balchunas warned that even diversified investments in the marijuana industry are still considered quite risky.

"I would say this is your classic speculation kind of investment — high risk, high reward," he said. "Not necessarily something that you'd bank on sending your kids to college with."

The funds's management fee of 0.75 per cent is "a little higher than the average ETF," said Balchunas, adding that such a premium price is to be expected in a hot-topic investment product.

Balchunas said he's received lots of inquiries about marijuana exchange traded funds from investors over the past year.

"Because even regular people are looking at this industry, and they want to know how to participate. They're very optimistic about it."