The world’s first Psychedelic ETF looks set to launch in January 2021, providing exposure to publicly-listed, psychedelics-focused life sciences companies in North America.
Horizons ETFs filed documents pertaining to ‘Horizons Psychedelic Stock Index ETF‘ on 24th December, but is yet to make a public statement.
Horizons is the fourth-largest ETF provider in Canada, with more than CAD$16 billion in assets under management across 93 ETFs. It brought the first cannabis industry ETF (TSE:HMMJ) to market in 2017. Now, Horizons looks set to provide investors with the first Psychedelic Stock Index ETF in the New Year.
The ETF’s High-Level Purpose
Neither Horizons, nor the provider of the underlying index (discussed below), has addressed this new ETF publicly. Psilocybin Alpha has reviewed filings made by the company to the Ontario Securities Commission in order to provide the information enclosed herein.
The high-level purpose of the ETF is to “invest in, and indirectly derive revenues from, companies in the psychedelics industry engaged in legal activities involving psychedelic drugs and substances.”
The company explained:
The ETF will passively invest in companies engaged in legal activities involving psychedelic drugs and substances in the U.S. where state and federal laws permit such activities. Such companies may also be involved in the Canadian legal psychedelics industry
The Underlying Index
Like many ETFs, PSYK will track an underlying index. As such, the way in which this index is structured and adjusted is of direct importance to the composition of the ETF.
In this case, the underlying index is the North American Psychedelic Stock Index, provided by German-based index provider Solactive.
In the filings we reviewed, the Index is described in broad strokes as follows (emphasis our own):
The North American Psychedelic Stock Index, the Underlying Index of the ETF, is designed to provide exposure to the performance of North American publicly-listed life sciences companies focussed on psychedelic medicines, and other companies with business activities in the psychedelics industry. The Underlying Index is designed to provide diversified exposure to the psychedelics industry, at weights that can easily and cost effectively be replicated, while at the same time reflecting the evolution of the industry in a timely fashion.
Criteria for Inclusion in the Index
Companies are generally deemed to be eligible for inclusion in the North American Psychedelic Stock Index if the company is:
- a producer and/or a supplier of psychedelic medicines;
- a biotechnology company that is engaged in research and development of psychedelic medicines; or
- a company that is part of the supply chain for, or a distributor of, psychedelics.
The Index will include public companies listed on both senior and junior exchanges in North America. This is important, as most psychedelics companies are listed on what are known as junior exchanges such as the TSXV or CSE. It is also worth noting that the Index will not include OTC markets, which may exclude a small number of companies; though, these companies are generally very small themselves.
At face value, then, it appears the Index has scope to provide good coverage of existing psychedelic companies.
However, there will also be a size (total marketcap) and liquidity barrier to entry for inclusion in the Index. The level of this barrier is not yet known.
Weighting and Rebalancing
The Index is weighted by float-adjusted market capitalisation (price multiplied by number of outstanding shares), with a maximum individual company cap of 10%. This will prevent a situation in which individual companies, such as CMPS and MMED, dominate the Index.
The Index will be rebalanced on a quarterly basis, allowing the addition (and removal) of companies in accordance with the liquidity and size criteria, and the reweighting of constituent companies. However, there is also provision for the addition of companies between rebalancing dates.
Among the risks identified by Horizons are the legal landscape of the psychedelic industry, the potential for failure in clinical trials, and the pivotal importance of intellectual property to the success of many companies in the space.
None of these risks should be news to investors in the psychedelics space.
The company also explains that, while psychedelic drugs are generally federally illegal in the United States, some states have successfully decriminalised and/or legalised certain psychedelics. Here, Horizons are referring to Oregon and Washington, D.C., in light of the November elections.
While the medical and adult use of certain psychedelic drugs and substances are generally prohibited under U.S. federal law, despite this prohibition, a limited number of states have either sought to decriminalize or authorize the medical use of certain psychedelic drugs and substances in limited circumstances. Clinical trials involving psychedelic drugs and substances are, however, permitted, provided they comply with both state and federal laws applicable to such trials.
Timelines & Technicalities
At this stage, Psilocybin Alpha can only ascertain that the Ontario Securities Commission has confirmed receipt of the Prospectus on December 24th. As such, it is important to note that we cannot assume that either the Securities Commission or the Exchange have reviewed or approved the proposed ETF. In fact, it is prudent to assume the opposite.
With that said, the filings submitted to the Ontario Securities Commission suggest the ETF could start trading January 15th, 2021.
The ETF is expected to trade on the NEO Exchange under symbol PSYK.
While the original listing will be in CAD, Horizons may also list on a U.S. exchange under the ticker symbol PSYK.U.
The annual management fee is set at 0.85% of the ETF’s Net Asset Value (NAV).
A Developing Story
This is a developing story. We will continue to provide coverage on this ETF as we learn more.