Investing in Cannabis: How the Sector Actually Works

A growing market and a good investment are separate questions, and cannabis is the cleanest demonstration of the gap either way. Legal sales kept rising through the period in which the equities lost most of their value. The AdvisorShares Pure US Cannabis ETF, the largest fund tracking American operators, went from $36.50 at the end of 2020 to $4.72 five years later — a fall of 87%. The broader Global Cannabis Stock Index fell 85.2% over the same window.

Then, in the twelve months to July 2026, the same fund returned more than 110%. Nothing about anyone’s revenue explains a swing of that size in either direction. What explains it is a Justice Department order signed in April, and that is the whole thesis of this sector: you are buying a legislative outcome, and the operating business is the vehicle, not the asset.

Where the ceiling actually comes from

In the United States, cannabis is legal under many state laws and was, until 2026, entirely prohibited under federal law. That contradiction is not a technicality. It produced three constraints that no amount of commercial execution could route around.

Tax. Section 280E of the Internal Revenue Code denies ordinary business deductions to any trade “trafficking” in a Schedule I or Schedule II substance. A licensed, tax-paying, state-legal dispensary could not deduct rent, wages or marketing. Effective tax rates well above the statutory rate were normal, and companies reported operating profits while remaining unprofitable after tax.

Banking and listings. Federally regulated banks and the major US exchanges kept their distance from plant-touching operators. Companies dealt in cash, borrowed expensively, and listed in Canada or on over-the-counter venues rather than the NYSE or Nasdaq — which also kept most institutional money out.

Capital. The first two constraints made the third inevitable. Companies that cannot deduct their costs and cannot borrow cheaply raise equity instead, repeatedly, and existing shareholders are diluted each time. A good deal of the 87% was arithmetic of that kind rather than a market losing faith.

What changed in April 2026, and what did not

On 23 April 2026 the Acting Attorney General ordered two narrow categories moved from Schedule I to Schedule III: cannabis contained in an FDA-approved drug product, and cannabis held under a qualifying state-issued medical licence. The order was published in the Federal Register on 28 April.

The consequence that matters commercially is automatic. Section 280E applies only to Schedule I and Schedule II, so for state-licensed medical operators and FDA-approved products 280E simply stopped applying — the single largest structural cost in the sector, removed by reclassification rather than by tax legislation.

What did not change is as important. Adult-use cannabis remains Schedule I, and 280E continues to apply to it in full. Most revenue in the large multi-state operators is adult-use. A DEA administrative hearing on whether to reschedule cannabis more broadly ran for eleven days, from 29 June to 15 July 2026; post-hearing briefs were due on 17 August; the Chief Administrative Law Judge then writes a recommendation. There is no final rule, and no fixed date for one. A reader arriving after that recommendation lands should check what it said rather than trust this paragraph.

The four things people mean by “cannabis exposure”

They behave differently enough that treating them as one sector is the first mistake.

• Plant-touching operators — cultivators, processors, dispensaries. Maximum exposure to 280E, to banking restrictions and to price compression when a state’s supply catches up with its demand, which it reliably does.
• Cannabinoid biotechnology — companies developing approved medicines. These follow clinical and FDA timelines, not retail cannabis prices, and their binary outcomes have little to do with the sector’s politics.
• Property — REITs that buy cultivation and retail sites and lease them back. The landlord is not trafficking, so 280E never applied; the risk is tenant credit, and the tenants are the operators above.
• Ancillary suppliers — lighting, packaging, point-of-sale software, logistics. They sell to the industry without touching the product, which historically kept them clear of the tax and banking constraints entirely.

The dek at the top of this article is not a hedge: the property and ancillary routes carried materially less regulatory risk than the growers, and were priced as though they carried the same.

Funds, and the concentration inside them

Thematic funds are the common entry point, and the word “diversified” does a lot of unearned work here. As of August 2026 the Amplify Alternative Harvest ETF (MJ) held eight individual stocks, and the AdvisorShares Pure Cannabis ETF (YOLO) held seventeen. A fund with eight positions in one policy-driven sector removes company-specific failure and leaves everything else. It is closer to a concentrated bet than to diversification, and it fell with the sector on the way down.

What would have to be true

The bull case is not “the market is growing” — the market grew for five years while the equities fell 87%. It is narrower and testable: that adult-use cannabis also leaves Schedule I, that 280E therefore stops applying to the bulk of operator revenue, and that the resulting cash flow is not competed away by the price compression that has followed every supply build-out so far. The first is pending before an administrative law judge. The second follows automatically from the first. The third has no precedent in this industry’s short history.

The bear case needs only the first to stall. That is what the January 2026 drawdown was — the fund fell 26% in a month on federal policy going quiet — and it is why the position sizing question below is the one that matters most here.

Frequently asked questions

How do you invest in cannabis?
Through listed growers and processors, biotechnology firms working on cannabinoid medicines, property companies leasing to operators, and ancillary suppliers that never touch the plant. Thematic funds bundle these, and the ancillary and property routes have historically carried less regulatory risk than the growers themselves.

Is cannabis a good investment?
The sector’s returns have tracked legislative expectations far more closely than revenue, which makes it a bet on politics wearing the costume of a bet on a growth industry. Legal cannabis sales rose substantially while sector equities fell sharply — a useful reminder that a growing market and a profitable investment are separate questions.

Why have cannabis stocks performed so badly?
Legalisation arrived alongside oversupply, price compression and heavy competition, so revenue growth did not convert into profit. Companies raised capital repeatedly and diluted existing holders, and in the United States the federal-state conflict kept banking, listings and tax treatment restrictive.

What are the main risks?
Regulation above all, because it can change the economics overnight in either direction. Then dilution, since capital-hungry companies issue shares; punitive tax treatment where federal law still classifies the product restrictively; and liquidity, as many of the listed names are small and thinly traded.

Are cannabis ETFs safer than individual stocks?
They remove company-specific failure, which is a real risk here, but not the sector risk that has driven the losses. A concentrated thematic fund falls with its theme. Check the holdings: some hold a handful of names, which is closer to a stock pick than to diversification.

How much should cannabis be of a portfolio?
Small enough that a total loss changes nothing about your plan. This is a policy-dependent, pre-profit sector with a documented history of severe drawdowns — a satellite position sized for that, not a holding to build around.

Sources

• US Department of Justice (2026). Justice Department Places FDA-Approved Marijuana Products and Products Containing Marijuana Subject to a Qualifying State-Issued License in Schedule III, 23 April 2026. The scope of the order — FDA-approved products and state medical licences only — and the retention of Schedule I for everything else are taken from here.
• Drug Enforcement Administration. Marijuana Rescheduling Regulatory Actions, and Federal Register, 28 April 2026. Hearing dates (29 June to 15 July 2026), the 17 August briefing deadline and the absence of a final rule are drawn from the docket.
• AdvisorShares. MSOS quarterly portfolio commentary. The $36.50 end-2020 to $4.72 five-year decline, the Global Cannabis Stock Index comparison, the Q1 2026 fall of 23.5% and the one-year return above 110% to late July 2026 come from fund reporting and index data for those specific dates. Fund returns move; the figures describe the windows named and nothing after them.
• Holdings counts for MJ and YOLO are as of August 2026 and change with rebalancing.

This article is general information, not personalised investment advice. It names funds and categories to describe how the sector is structured, not as recommendations, and it does not take into account the financial situation, objectives or risk tolerance of any individual reader. Cannabis equities are a pre-profit, policy-dependent sector with a documented history of severe drawdowns. Capital is at risk and past performance does not indicate future results.