Is The World’s First Psychedelics-Focused ETF A Dope Buy?

Is The World’s First Psychedelics-Focused ETF A Dope Buy?
Reda Farran, CFA

almost 3 years ago3 mins

Mentioned in story

What’s going on here?

The world’s first psychedelics-focused exchanged-traded fund (ETF) made its debut just days after my last psychedelics-focused Insight in late January. The Horizons Psychedelic Stock Index ETF (ticker: PSYK) gives investors a new way to gain exposure to an emerging healthcare subsector full of companies working with psychedelic substances like psilocybin and LSD.

The launch of a “shroom stocks” ETF follows a recently resurgent wave of investor enthusiasm for shares of cannabis companies, a.k.a. “weed stocks”. Given the common misconceptions surrounding this newly investable area, I thought it’d be worth revisiting the psychedelics investment thesis – as well as taking a closer look at the nuts and bolts of the fund itself.

What does this mean?

Psychedelics companies want to disrupt the $70 billion mental healthcare market by trying to create regulator-approved treatments for a wide range of psychiatric disorders. The sheer scale of the opportunity has investors excited. Depression, for example, affects more than 264 million people worldwide – but research from Imperial College London suggests that psychedelic substances could cure it altogether by rewiring the brain. That’s in contrast to medical cannabis treatments, which only target the symptoms of mental disorders.

Psychedelics could also play a major role in treating opioid addiction – another major public health crisis, particularly in the US. MindMed, one of the largest holdings in the PSYK ETF, is currently conducting related clinical trials with a non-hallucinogenic compound based on an African tree extract long used for ritual purposes.

When it comes to regulation, most psychedelics are, like cannabis, federally outlawed in the US and banned in many other countries around the world. But restrictions on psychedelics are gradually being lifted across certain parts of North America – and unlike with weed, little push for recreational rule changes leaves the sector’s focus tighter and the overarching regulatory picture somewhat clearer.

Why should I care?

The psychedelics space isn’t without its fair share of risk. Because these early-stage companies are often looking to secure regulatory approval for individual drugs, investing in single stocks is particularly risky: one bad clinical outcome could be disastrous for that company’s share price.

It might therefore make more sense to spread your psychedelic investment across a more diversified basket of stocks – which is where the PSYK ETF comes in.

PSYK’s holdings and weightings at inception
PSYK’s holdings and weightings at inception

The ETF is passively managed, meaning its portfolio’s composition and rebalancing follow predetermined rules. While larger stocks get higher weightings, no one company is allowed to represent more than 10% of the ETF’s value, helping avoid over-concentration. PSYK’s flexibility also lets it rapidly incorporate eligible new initial public offerings (IPOs) – another good thing in light of the number of upcoming listings. But with an annual management fee of 0.85%, the fund certainly isn't cheap.

The ETF does trade on Canada’s small NEO exchange, which means it isn’t available to buy on all broker platforms just yet. If you can’t wait to get access, you could instead replicate PSYK by investing a small amount in the top five or 10 holdings listed above in similar proportions.

On the topic of holdings, one of the things I find most interesting about this ETF is that it also includes traditional pharmaceutical companies working with psychedelic substances, like AbbVie and Johnson & Johnson. The more you think about this, the more it makes sense. Like biotech firms, the small psychedelic companies will likely develop, test, and seek approval for drugs which they then sell on to pharmaceutical giants for mass production.

In 2019, for example, US regulators greenlit production of Johnson & Johnson’s prescription nasal spray Spravato, a close chemical cousin of ketamine that aims to alleviate depression. But Spravato was originally developed by Canadian life sciences company Pharmather, owned by Toronto-listed Newscope Capital.

I conclude with a word of caution, however. Remember that this is a fledgling industry dealing with substances that remain illegal in most countries. Any investment within the psychedelic space therefore comes with a lot of risk – and you should only consider deploying a very small part of your total portfolio. Early investors in the ETF have, after all, had a rollercoaster ride…

The S&P 500 index and even the Nasdaq Composite have been less wild recently
The S&P 500 index and even the Nasdaq Composite have been less wild recently


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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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