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A Year of Psychedelics ETFs: Portfolios in Review

A year ago, there were no psychedelics-focused exchange-traded funds (ETFs) available to investors. Now there are three.

Within just 12 months of the world’s first psychedelics ETF launching in Canada in January 2021, another two funds have become available to investors through firms in the United States.

First introduced in 1993, ETFs remain a popular way to invest because they give investors access to a range of stocks without researching and picking from listed companies individually. Their popularity also stems from the fact that they are considered low risk because they are low-cost and can include a variety of different securities.

With mounting evidence showing psychedelics’ potential to address unmet physical and mental health needs, and as the rescheduling, decriminalization, and legalization of psychedelics becomes more widespread, the psychedelics drug market is projected to reach a total value of $10.75 billion (USD) by 2027.

Horizons ETFs Management’s Psychedelic Stock Index ETF

Horizons ETFs Management’s Psychedelic Stock Index ETF (PSYK) began trading on Canada’s NEO Exchange on January 26, 2021, making it the world’s first psychedelic stock ETF.

Like many ETFs, PSYK is passive, meaning it tracks an underlying index. The PSYK ETF is based on the North American Psychedelic Index, which tracks the performance of life sciences companies with business in or significant exposure to the psychedelics industry with a minimum float market capitalization of $25 million (CAD) and a minimum share price of $0.10 (CAD). The index is rebalanced quarterly, but a company can be fast-tracked for inclusion if it has a float market capitalization in excess of $50 million (CAD).

Initially launched with a portfolio of 17 North American life sciences companies, the fund now includes 24 psychedelics-focused companies. When the ETF launched, Horizons ETFs Management CEO Steve Hawkins told Truffle Report that two standout inclusions in the fund were Cybin and MindMed, both companies that remain top holdings in the portfolio today at 9.86% and 9.27%, respectively.

The ETF is dominated by these mid to large-cap psychedelics companies. As of December 3, 2021, it is led by Compass Pathways (12.8%). Other significant holdings include atai Life Sciences (8.79%), Revive Therapeutics (7.98%), and Field Trip Health (7.84%). 

Unfortunately, since its launch almost a year ago, this ETF has not delivered outstanding returns to its investors. At the time of writing, PSYK is trading for around $5.30 (CAD) per unit, down from its opening price of $10.00 (CAD). This is indicative of wider market trends, and is not exclusive to this or other psychedelic ETFs.

Defiance Next Gen Altered Experience ETF

American investors gained access to a psychedelics-focused ETF in June with the launch of the Defiance Next Gen Altered Experience ETF (PSY) on the NYSE Arca.

The PSY ETF offers investors exposure to both psychedelics and cannabis companies. It tracks the BITA Medical Psychedelics, Cannabis, and Ketamine Index, which includes companies that derive at least half of their revenue from psychedelics, medicinal cannabis, and ketamine for medicinal and health treatment purposes. At the time of launch, Defiance ETFs’ Chief Investment Officer Sylvia Jablonski told Truffle Report the PSY ETF contained “the healthiest mix of what actually exists” across the cannabis and psychedelics stock markets.

To be included, companies must have a minimum market cap of $75 million (USD). No single company can exceed more than 7% of the index, and it is rebalanced on a semi-annual basis.

While about half of this ETF’s portfolio is cannabis companies, investors also have exposure to psychedelics companies such as Seelos Therapeutics (5.97%), Compass Pathways (5.87%), MindMed (4.87%), atai Life Sciences (4.60%), and Field Trip Health (4.56%). 

Like PSYK, this ETF has delivered negative returns for its investors to date, having sunk to about $13.90 a unit down at the time of writing from its opening unit price of $26.99. 

Advisorshares’ Psychedelics ETF

Last but not least, we have Advisorshares’ Psychedelics ETF (PSIL), which began trading on the NYSE Arca on September 15. This ETF concentrates its portfolio on companies deriving the majority of their net revenue or devoting the majority of their assets to psychedelic drugs.

Unlike the psychedelic ETFs that came before it, this ETF is actively managed, meaning the Portfolio Manager — Advisorshares’ Chief Operating Officer Dan Ahrens — can adjust the portfolio more quickly and opportunistically than can occur for an index-based ETF, which has to wait for its periodic rebalancing (often quarterly).

While this ETF provides access to the leading companies in the psychedelics space included in the other two ETFs, it also provides investors access to numerous micro-cap psychedelics companies. As of November 30, 2021, Advisorshares says the ETF comprises a whopping 58.8% micro-cap companies, 38.8% small-cap companies, 0.3% large-cap companies, and 2.1% cash. 

Which ETFs Should You Choose?

For the risk-averse investor, both PSYK and PSY are geared towards more established companies in the psychedelics space, such as Compass Pathways, Cybin, MindMed, Field Trip Health, and atai Life Sciences.

If you are looking for the greatest diversity, PSY does offer access to both the psychedelics and the cannabis markets, but this could limit its growth potential.

For investors with a higher risk tolerance, the newest ETF on the market, PSIL, may offer the greatest growth potential because it is currently dominated by micro-cap companies.

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