Robinhood’s Fatal Flaw Has Investors Missing Out on Some Serious Green

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This has been a year that Wall Street and retail investors won't soon forget. Between the uncertainty tied to the coronavirus disease 2019 (COVID) pandemic and election concerns, equities have been whipsawed since late February. The iconic Dow Jones Industrial Average has logged 14 of its 16 biggest single-day point declines in history this year, as well as eight of its nine largest single-session gains. 

For long-term investors, these wild vacillations in the stock market represent opportunities. Since every notable correction is eventually wiped away by a bull market rally, a volatile market is a great time to buy into high-quality companies.

A person holding a smartphone that's showing equity losses and a declining red chart.

IMAGE SOURCE: GETTY IMAGES.

Short-term investors have flocked to online investing platform Robinhood

However, a highly volatile stock market also tends to attract short-term traders who have visions of getting rich quick. Online investing app Robinhood — known for its commission-free platform, fractional-share investing, and gifts of free stock to new members — has added millions of millennial and novice investors in 2020.

Young investors should take an interest in investing. Time is investors' greatest ally, and the younger people are when they begin putting their money to work in the market, the more leverage they'll have to build wealth.

Yet many Robinhood investors aren't thinking long term. The platform's leaderboard (i.e., the 100 most-held stocks) is filled with myriad penny stocks and otherwise awful businesses, hurting millennials' ability to grow their wealth.

This is far from the only problem you'll find in Robinhood's highly popular investing platform. The biggest issue just might be that members are only allowed to buy stocks listed on major U.S. exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq.A black silhouette of the U.S., partially filled in by baggies of cannabis, rolled joints, and a scale.

IMAGE SOURCE: GETTY IMAGES.

Robinhood's fatal flaw has investors missing out on the green rush

In some ways, not being able to invest in over-the-counter stocks is good. Publicly traded companies listed on the OTC exchange are often penny stocks, or have failed to provide regular financial statements for investor inspection. But not all OTC-listed stocks are avoidable.

U.S.-based marijuana stocks find themselves in a bit of a dilemma. They'd love to uplist from the less-followed and less liquid OTC exchange to the NYSE or Nasdaq. Unfortunately, they can't. Cannabis is classified as a Schedule I substance at the federal level, meaning the NYSE and Nasdaq won't allow companies that grow or sell marijuana to list on their exchanges.

Canadian marijuana stocks that don't sell cannabis in the U.S. are allowed to list their shares on the NYSE or Nasdaq, assuming they meet other listing standards.

The U.S. has a considerably larger and more lucrative marijuana market than Canada. Even without federal legalization, California alone is outselling all of Canada on an annual basis. Yet Robinhood investors are incredibly limited in their ability to buy individual pot stocks focused on the U.S. market. Instead, they only have poor-performing Canadian pot stocks to choose from on major U.S. exchanges.

Aurora Cannabis (NYSE:ACB), Canopy GrowthAphriaHEXOTilray, and Cronos Group are all top-100 holdings on Robinhood. In fact, Aurora Cannabis was once the most-held stock on the entire platform.

But Aurora also exemplifies the poor quality of weed stocks available to Robinhood investors. The company has ballooned its outstanding share count by more than 11,800% in a little over six years. It also wrote down around $2.8 billion Canadian in fiscal 2020 after grossly overpaying for its acquisitions and overextending its capacity.

Canadian pot stocks aren't the best ways to take advantage of the fast-growing green rush, and that's really tied Robinhood users' hands.

Cannabis plants in a metal shopping basket.

IMAGE SOURCE: GETTY IMAGES.

The smart way for Robinhood investors to buy into the cannabis craze

Thankfully, a recently launched exchange-traded fund (ETF) offers Robinhood investors a workaround for the platform's limitation.

Until recently, Robinhood investors who wanted U.S. marijuana exposure could really only buy into marijuana-adjacent opportunities, like cannabis-focused real estate investment trust Innovative Industrial Properties or Scotts Miracle-Gro

But during the first week of September, the AdvisorShares Pure U.S. Cannabis ETF (NYSEMKT:MSOS) was born. This is the very first ETF focused solely on the U.S. marijuana market. Since it's listed on the NYSE Arca exchange, it's within the universe of securities that Robinhood investors can buy.

As of Nov. 4, the AdvisorShares Pure U.S. Cannabis ETF held 24 marijuana stocks in its portfolio, with the top five accounting for almost 46% of invested assets. 

More than 55% of this ETF's invested assets are devoted to vertically integrated multistate operators (MSOs). These are companies like Green Thumb Industries (OTC:GTBIF) and Curaleaf Holdings (OTC:CURLF) that control the seed-to-sale process. They own cultivation and processing sites in select legalized states, and sell flower and derivative products in owned or leased dispensaries. Curaleaf, which holds more than 130 retail licenses in nearly two dozen states, seems on track to hit $1 billion in sales next year. Meanwhile, Green Thumb can hit $1 billion in annual sales by as soon as 2023.

Lack of access to OTC stocks has clearly put Robinhood investors at a disadvantage. The AdvisorShares Pure U.S. Cannabis ETF gives them an opportunity to buy into the higher-growth and higher-quality U.S. pot industry.

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