Europe’s first marijuana exchange-traded fund started trading on Tuesday. Stiff competition for paltry inflows in the U.S. means more could follow

Europe got its first cannabis exchange-traded fund this week. The news is as much a sign of pressures in the North American pot industry as one of pent-up demand among European investors.

The Medical Cannabis and Wellness ETF started trading on the Frankfurt stock exchange on Tuesday. It is being launched by Purpose Investments, a Canadian asset manager that created a similar product for its domestic market two years ago, and London-based ETF provider HANetf.

The new European fund is linked to a basket of medical marijuana stocks listed in the U.S. and Canada. Around half “touch the plant,” meaning the companies are directly involved in growing cannabis. The others provide services like fertilizer or property leasing to the pot industry. To make the ETF palatable to conservative investors, names that make money from recreational cannabis are screened out.

A diverse basket of companies is less risky than highly volatile individual pot stocks. European investors can already buy into more than a dozen U.S. and Canadian ETFs that target the sector, but a locally listed version removes the complication of U.S. dividend withholding tax—even if most companies that deal with cannabis are still a long way from paying dividends. It also lets them trade in their own time zone.

Purpose Investments may benefit from an early-mover advantage. The Horizons Marijuana Life Sciences Index and Alternative Harvest ETFs, the first to launch in the Canadian and U.S. markets respectively, had captured 88% of the total assets under management among North American cannabis ETFs by the end of last year, Morningstar data shows.

The push into new markets also reflects the squeeze at home. Cannabis stocks had a torrid 2019 as the black market proved more resilient than expected in important states like California and worries about profitability dented sky-high stock market valuations. Some North American cannabis ETFs ended 2019 down more than one-third. Inflows slowed to a trickle, for which competition is stiff: There were 16 cannabis ETFs domiciled in North America by the end of last year, up from only two in 2017.

Against this backdrop, Purpose likely won’t be the last cannabis investor to venture across the Atlantic. Last year’s troubles haven’t stopped the spread of pot plays—and may even be encouraging it.