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Psychedelic Equities

A new exchange-traded fund claims to offer better investing through chemistry, but investors should consider the potential for side effects before taking the plunge.

On Jan. 27, Horizons Psychedelic Stock Index ETF began trading on Canada’s NEO Exchange. The fund offers exposure to 17 publicly traded companies that focus on the use of psychedelics to treat mental health issues. The idea is that substances such as LSD may be useful to treat conditions including post-traumatic stress disorder, obsessive-compulsive disorder, addiction and depression. The fund has applied for listing on the Nasdaq market, too.

Small studies have supported the idea that psychedelic compounds, administered in a clinical setting, can help with certain mental health issues. Many psychedelic compounds, including LSD, were originally developed for use in psychiatric therapies, and there has been a recent push to reexamine their therapeutic potential. Researchers at Johns Hopkins published a paper in 2018 urging the government to make psilocybin, the main psychoactive element in psychedelic mushrooms, legal in clinical settings. It, like LSD, is currently a Schedule I drug, meaning it has no accepted clinical uses. As long as psychedelic substances retain this classification, large-scale studies remain impractical in the U.S.

In Canada, many psychedelics remain equally regulated. As of last year, however, its Ministry of Health granted a handful of exceptions to allow professionals to research the effects of psilocybin. A few places in the U.S. have also recently voted to allow the use of psychedelic substances at licensed facilities for medical purposes. Oregon approved psilocybin for therapeutic use, as well as decriminalizing personal possession. Washington, D.C. also decriminalized psilocybin this fall. California, Vermont and Iowa have proposed, but not yet passed, similar legislation. Federal regulators have also approved some adjacent projects. For example, in 2019 the U.S. Food and Drug Administration approved Spravato, a nasal spray from Johnson & Johnson aimed at alleviating depression. It is chemically similar to the hallucinogenic drug ketamine. That said, researchers still face serious legal hurdles in the United States, especially for larger studies in nonlaboratory conditions.

Many observers have drawn comparisons between the new psychedelic ETF and marijuana ETFs. Horizons ETFs Management launched the first cannabis-focused exchange-traded fund in 2017, further emphasizing the parallel. There are some differences, though. The marijuana industry may eventually include recreational products; the Horizons psychedelic ETF focuses only on companies exploring medical applications. Yet like marijuana, psychedelics face the hurdle that they are still illegal under U.S. federal law. And, at least so far, they lack the wider public support marijuana has begun to gather.

None of this is to say that mental health is not an important area for research, or even that psychedelics may not prove to have some genuine therapeutic uses. But it is hard to identify a compelling reason for investors to seek exposure to the sector at this stage. As even some Horizons investors have observed, it is risky to bet on just one early-stage company or a particular clinical trial at this point. I am skeptical that Horizon’s ETF spreads that risk effectively. Even bundling these companies together does not guarantee that any of them will perform well in the long term.

I wrote about marijuana equities in this space a few years ago. I argued that they were, and are, inherently speculative. Because state and federal regulations clash in so many jurisdictions, marijuana’s status in the U.S. is, at best, unclear. Without knowing how these conflicts will be resolved, any attempt at due diligence involves some level of speculation. The same is true for psychedelics, with even less evidence that regulation may ease in the short term. As with marijuana funds, too, many of the companies in the index the psychedelic fund tracks are relatively new, offering correspondingly short track records for investors to evaluate. Assuming regulators decide to approve research into psychedelic compounds, there is no guarantee a particular company will thrive over time. As I observed in 2019, even a fund composed entirely of small pharmaceutical or biotech companies with uncontroversial research programs would not offer enough diversification.

Like marijuana ETFs, this psychedelic fund can capitalize on the idea of letting investors get ahead of the curve in an area where norms are changing. But there is no compelling reason to focus on such a speculative and specific area. Investors who want to include exposure to companies working on new medical breakthroughs have many options that cast a wider net with less risk. At least for now, investors will be wise to just say no to Horizons’ offering.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, is the author of Chapter 20, “Giving Back,” in our firm’s most recent book, The High Achiever’s Guide To Wealth. He also contributed several chapters to the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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