Trump Just Eased Federal Marijuana Laws. Is there an Investment Case for Cannabis ETFs Right Now?

This week brought promising news for the cannabis industry.

On Thursday, the Justice Department (DOJ) reclassified marijuana products licensed by states from Schedule 1 -- the most restrictive federal category that includes heroin -- to the less strictly controlled Schedule III. That group includes less-addictive drugs such as testosterone and codeine.

That could have major implications for the ailing cannabis industry and is likely to revive investor interest in cannabis stocks and exchange-traded funds (ETFs).

Indeed, AdvisorShares Pure U.S. Cannabis ETF (NYSEMKT: MSOS), which focuses exclusively on the U.S. cannabis market, was up more than 6% in mid-morning trading on Friday. The ETF has 20 holdings and $729 million in net assets.

Amplify Alternative Harvest ETF (NYSEMKT: MJ) targets the broader global cannabis market -- with a heavy weighting on Canadian cannabis producers -- and holds 10 stocks, with about $116 million in net assets. The ETF climbed more than 2% in early trading on Friday morning.

And AdvisorShares Pure Cannabis ETF (NYSEMKT: YOLO) – which, like MSOS, is operated by AdvisorShares – adds some global stocks to the mix, though it still gives greater weight to U.S. companies. The ETF holds 18 stocks and has net assets of about $31 million. The ETF was down about 1.3% in early Friday trading.

The DOJ order was limited to medical marijuana

Several of those ETFs and underlying cannabis stocks spiked on the news Thursday but settled back quickly, however. That may be because investors quickly realized that the federal reclassification was only for medical use of cannabis, not recreational.

But in fact, there's good news for recreational use, also. The DOJ order also established a June hearing to consider reclassifying recreational marijuana. The changes, to both medical and recreational use, are driven by an executive order President Trump signed last December for U.S. agencies to begin the process of downgrading cannabis to a less restrictive category of drugs.

Image source: Getty Images.

Trump is clearly disposed toward greater use of illegal or once-illegal drugs. Last weekend, he signed an order directing the Food and Drug Administration to ease restrictions on and speed up reviews of certain psychedelic drugs, cutting their review times to one or two months from the previous six to 10 months.

When he signed this week's order on marijuana, Trump accused his own administration of "slow walking" him on rescheduling it.

That bodes well for the entire cannabis industry, which continues to struggle with full access to the banking system and capital markets because cannabis remains illegal at the federal level. The industry also faces high state excise taxes and federal tax provisions that raise its tax burden. Both the financial system restrictions and tax laws drive industry expenses higher and profits lower for the industry.

The incremental path to full legalization -- or at least to less restrictive policies -- should ease some of the industry's profitability obstacles.

The DOJ order could also increase demand for cannabis, as it is likely to make legalization more appealing in more states, broadening the availability of both medical and recreational cannabis.

So while this week's reclassification was somewhat limited in scope, it is certainly good news for the cannabis industry, making now a good time to invest.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.