What's the difference between an ETF and an Index?
An index is what we refer to as a theoretical passive basket of securities which are grouped together based on a series of common selection criteria. With a stock index, a stock is generally included as long as it meets the specific inclusion criteria set out in the index methodology, which are the rules that set out what kind of stocks are included in the index or the reasons why certain stocks are excluded or dropped from the index.
Typically, an index will theoretically invest in a certain geographic area or sector, and then weight the stocks it represents based on criteria, such as stock size and volume. The big difference between a passive index strategy and an active index strategy is that the index does not make any qualitative decisions on what stocks should be included in the index. As long as the stock meets the index criteria, it’s included in the index. In contrast, with an active strategy, a portfolio manager is typically selecting what stocks they think are the best in that sector or geographic region and making a discretionary decision to own or not own the security.
HMMJ is an index-replicating ETF that seeks to replicate the returns of North American Medical Marijuana Index. The ETF is simply the delivery mechanism through which investors can get exposure to that Index. Often, you can have multiple ETFs that track the same index, sometimes at different price points, or in different currencies.
In this case however, HMMJ is the only ETF in the world that replicates the North American Medical Marijuana Index.
What is your weighting methodology?
The North American Medical Marijuana Index that HMMJ tracks is market-capitalization weighted, meaning that the larger companies by market-capitalization take up a larger weight in the Index in proportion to their size. However, to ensure the Index has adequate diversification, stock weights are capped at 10% on each quarterly rebalance. This ensures that the top four or five stocks, which are probably bigger than the rest in the Index combined, do not take up the entire portfolio, allowing HMMJ to provide diverse exposure to a wide variety of companies that have exposure to the marijuana industry.
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