You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Friends,
The first cannabis exchange-traded fund (ETF) launched in 2017, and we have been following the developments closely since then. Today, we are tracking 11 ETFs. We recently shared a review of these funds with subscribers to our premium cannabis due diligence service 420 Investor, concluding that there has been a substantial evolution over the past four years, though few of the ETFs have been able to scale. Further, performance relative to benchmarks hasn’t been particularly strong. Some ETFs don’t have benchmarks, which we believe does a disservice to investors who deserve accountability.
There are now 4 cannabis ETFs that have grown to assets in excess of $100 million, including AdvisorShares Pure US Cannabis ETF (NYSE ARCA: MSOS), ETFMG Alternative Harvest ETF (NYSE ARCA: MJ), Horizons Marijuana Life Sciences ETF (TSX: HMMJ) and AdvisorShares Pure Cannabis ETF (NYSE ARCA: YOLO). 3 others have at least $50 million in assets under management, including Global X Cannabis ETF (NASDAQ: POTX), Amplify Seymour Cannabis ETF (NYSE ARCA: CNBS) and The Cannabis ETF (NYSE ARCA: THCX).
AdvisorShares Pure US Cannabis ETF
MSOS, which we have written about extensively, has been a great commercial success and the only ETF with more than $1 billion in assets. It was the first ETF to use swaps to gain exposure to American cannabis operators. This solved a vexing problem for people who wanted to invest in them but could not do so because they traded on Canadian exchanges or the OTC market. The performance, in our view, has been poor, especially for a fund that bills itself as actively managed. We also note that this is one of the few ETFs with no stated benchmark. Finally, while the ETF should appeal to certain investors unable to invest directly in its holdings, the concentration is quite high, with the top 5 names currently representing 58% of the holdings and the top 10 totaling almost 84%.
ETFMG Alternative Harvest ETF
MJ is very heavily weighted towards Canadian LPs, which are 6 of the top 10 names, and it has no exposure to American operators. In its early days, the ETF was even more heavily focused on Canadian LPs. The top 10 names represent 53% of assets. The performance in 2021 and 2022 is better than other ETFs, but this is because the ETF has substantial exposure to non-cannabis names, including several tobacco companies.
Horizons Marijuana Life Sciences ETF
HMMJ, the first ETF in the cannabis sector, has evolved substantially. It was originally exposed almost entirely to Canadian LPs, but today the fund has substantial exposure to ancillary and biotech names as well. In fact, the top 3 names are not LPs. The ETF has extreme concentration in a few names, with these top 3 names accounting for 46%. The top 10 represent 83.2%. For Canadian investors, this ETF may be of appeal, but most American investors would be better served to invest directly in the few securities held or to choose another ETF.
AdvisorShares Pure Cannabis ETF
YOLO, which has a 35% stake in MSOS, also owns several of the components in its sister ETF, leaving it with outsized exposure to one name in particular. 67% of the ETF is in MSOS, Innovative Industrial Properties (NYSE: IIPR) and Village Farms (NASDAQ: VFF), making it very easy for investors to replicate on their own and save on management fees. This ETF, in our view, doesn’t take advantage of its ability to have a broadly diversified portfolio. There is no stated benchmark, but given its flexibility, the New Cannabis Ventures Global Cannabis Stock Index could be considered a proxy. Thus far in 2022, the ETF’s return of -19.1% trails the index return of -17.4%, while it outpaced it in 2021.
Global X Cannabis ETF
POTX is heavily weighted towards Canadian LPs but invests across various sub-sectors. It has no exposure to American operators. 7 of the top 10 holdings are Canadian LPs, and the top 10 represent over 66% of the assets.
Amplify Seymour Cannabis ETF
CNBS only recently began investing in American operators through swaps, allowing it to become one of the most flexible funds. From our perspective, this is perhaps the best ETF for investors who want broad exposure to the market and who appreciate active management. The top 10 holdings represent 59% of the assets, with exposure to 5 American operators, 3 Canadian LPs and 2 ancillary names. One negative is that the ETF has no formal benchmark against which to measure performance.
The Cannabis ETF
THCX, which has no stated benchmark, is perhaps the best diversified ETF (top 10 = 44%), but there is no exposure to American operators. This one has no stated benchmark.
Conclusion
We believe a lot of progress has been made over the past four years. Now, investors can find ETFs that give them exposure to American operators, for example. In the past, the ETFs were overly exposed to the Canadian market and also included names that weren’t related to the industry. Today, investors have a lot of options to gain exposure to various parts of the market, and a couple of ETFs are broadly diversified across all parts of the market.
The performance of the ETFs has been quite negative in absolute terms, but this reflects the performance of the market. Still, the returns have not been strong relative to the market. We also note that several of the ETFs don’t have formal performance benchmarks. In our view, most of these ETFs have tended to be too concentrated in the very largest names, which, in our view, makes it easy for investors to just buy these securities themselves. Looking ahead, we hope that the ETF managers who claim to be actively managing their funds will deliver performance that justifies the fees.
ETFs certainly serve a purpose, allowing investors to participate in the cannabis theme without having to pick stocks. We are pleased to see the market evolving, but most investors are likely at this time to be better off picking their own stocks.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Agrify Borrows $65 Million Under New Debt Facility
- Ayr Wellness Q4 Revenue Increases 16% Sequentially to $111.8 Million
- Exclusive: Canadian Cannabis Sales Declined 2% in January Sequentially
- HEXO Reports $670 Million Q2 Operating Loss
- High Tide Q1 Revenue Increases 34% Sequentially to C$72.2 Million
- iAnthus Q4 Revenue Declines 3% Sequentially to $47.1 Million
- MariMed Q4 Revenue Declines 7% Sequentially to $31 Million
- Exclusive: Pricing Pressure Emerges as a Key Theme Among Cannabis Companies
- TerrAscend Generates Flat Q4 Revenue Sequentially at $49.1 Million
- Exclusive: This Cannabis Fund Is Behind Some of the Biggest Ancillary Players in the Industry
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Sincerely,
Alan & Joel
