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BlackRock is nearing a marijuana ETF as legal obstacles start to fade

Conflicting US laws around cannabis had encouraged big banks to shy away from providing custody services to would-be issuers of marijuana exchange-traded funds.

[NEW YORK] The fund industry is getting more relaxed about marijuana investment.

BlackRock, the world's largest asset manager, is "likely" to start a cannabis-focused exchange-traded fund (ETF), as concern about the legality of such strategies starts to fade, according to Bloomberg Intelligence.

Other large issuers could follow, boosting assets in marijuana ETFs to US$5 billion over the next few years, analysts led by Eric Balchunas wrote in a report on Friday.

"Like a big movie studio, BlackRock is apt to copy others' successful theme ETFs," wrote Mr Balchunas.

"BlackRock coming in would add some legitimacy along with some fee pressure."

A spokesman for the money manager said the firm has no plans to offer a marijuana ETF.

Marijuana, or cannabis, is also popularly known as 'pot' or 'weed'.

It all sounds a bit pie in the sky, but BlackRock is investing in thematic strategies.

These types of funds have quickly become big business, attracting more than US$49 billion in the US.

Last month, the money manager said that it plans to create and market ETFs based on five "megatrends", which go beyond traditional sectors and geographic focuses, although none of these explicitly dovetails with cannabis stocks.

Meanwhile, the legal environment for 'pot' funds is looking much more friendly.

Conflicting US laws around 'weed' had encouraged big banks to shy away from providing custody services to would-be issuers of marijuana ETFs.

But now the US regulator is asking 'pot' ETFs to produce third-party legal opinions verifying that they don't violate state or federal laws, offering welcome cover for anyone thinking about dipping a toe into the booming industry.

The world's largest 'weed' ETF, the US$1.1 billion ETFMG Alternative Harvest ETF, submitted legal documents in May stating that the ETF and its investments did not run afoul of any laws. The cannabis companies it invests in all have necessary permits and licenses to operate, according to the filing.

The US$59 million AdvisorShares Pure Cannabis ETF - which trades under the ticker YOLO, often recognised as an acronym for "You Only Live Once" - submitted a similar letter in April.

"The outside legal opinions can provide cover," said Todd Rosenbluth, director of ETF research at CFRA Research.

"Consistent with what we've seen with other thematic ETFs, the smaller, more narrowly focused ETF providers will spot a theme and then launch products, and at some point it will hit the radar for the big boys."

So far, smaller issuers have dominated issuance. A new fund from OBP Capital, a unit of the Nottingham Co, started trading this week, and Global X Management Co also wants to bring a cannabis-themed ETF to market, regulatory filings show.

Any entry by BlackRock would shake up the nascent category, and only about two or three products will win out, Mr Balchunas wrote.