Weeding Through The New Cannabis ETFs

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Includes: CNBS, MJ, THCX, TOKE, YOLO
by: Jane Edmondson
Summary

Until recently, the only cannabis-related ETF was a watered-down version full of tobacco stocks.

Nonetheless, that ETF, the ETFMG Alternative Harvest ETF, thanks in part to its first-mover advantage, has gathered over $1 billion in assets.

A new slate of more pure-play cannabis ETFs has finally come to market.

Let’s analyze these offerings in more detail and “weed” through the differences.

MJ - The First Marijuana ETF

The first cannabis ETF, the ETFMG Alternative Harvest ETF (MJ), launched in December of 2017. But its launch has an interesting backstory. This was not originally a marijuana ETF, but was converted from a Latin American real estate ETF. That move allowed MJ to avoid some of the regulatory scrutiny facing new entrants to the cannabis ETF market today. But it has also painted the ETF in something of a corner as well. It does not hold a lot of the pureplay cannabis names now being allowed in the new ETFs launching today that have satisfied regulators by obtaining outside legal opinions. As a result, it cannot have the word cannabis in its name, as 80% of the holdings in aggregate do not meet the purity test of having at least 50% in cannabis or hemp-related revenues.

AdvisorShares Pure Cannabis ETF (YOLO) Launches in April

Unlike MJ, YOLO is an actively managed ETF as opposed to a passive, index-based ETF. Whereas YOLO can add to positions at any time, MJ rebalances quarterly. This is a key disadvantage given the dynamic nature of the cannabis space. YOLO also invests in pureplay cannabis names as opposed to MJ’s watered-down version. Note that YOLO actually has the name cannabis in its name, meaning it meets the purity test of 80% of the portfolio’s weight in companies generating at least 50% of their revenues from cannabis-related activities.

Because it is an actively managed ETF, that places a greater burden on the expertise of the manager. The ETF’s portfolio manager is Dan Ahrens. He is also listed as a Managing Director and the Chief Operating Officer of AdvisorShares. Ahrens has previously managed a Vice Fund and a Gaming and Casino Fund, but this appears to be his first foray into the world of cannabis investing.

YOLO’s expense ratio of 0.74% is slightly less than MJ’s despite its active management. Recently, the ETF started offering exposure to U.S. Multi-State Operators (MSOs) via swaps. That pushes the envelope from a regulatory standpoint given the ETF is invested (using derivatives) in companies operating illegally at the federal level. It is the first ETF to take this very aggressive approach.

The Cannabis ETF (THCX)

The next ETF to launch in early July was The Cannabis ETF, a passive ETF that tracks the Innovation Labs Cannabis Index. Superior to MJ, the ETF rebalances on a monthly versus quarterly basis. Both MJ and THCX use a modified market cap weighting methodology, which means its weights favor the largest companies. The ETF’s net expense ratio comes in slightly lower than that of MJ at 0.70%.

Looking at the basket of approximately 35 names it holds, it does offer more pureplay exposure than MJ. But being a passive ETF, it is not quite as nimble as an actively managed offering. For example, it still holds Canadian cannabis grower CannTrust Holdings despite its recent regulatory breach and the firing of its CEO. This highlights the disadvantage passive ETFs have in the space given the extreme volatility and dynamic nature of the industry.

Amplify Seymour Cannabis ETF (CNBS)

The first ETF to be actively managed by a known cannabis expert is the Amplify Seymour Cannabis ETF, managed by CNBC contributor and “Fast Money” show co-host Tim Seymour. It launched on July 23rd.

In its marketing materials, the ETF differentiates itself using the clever acronym P-L-A-N-T:

  1. Purity - 80% of the portfolio companies with 50% or more of their revenue from the cannabis and hemp ecosystem.
  2. Legal Review - CNBS will only hold companies deemed to be abiding by the federal laws within the countries they operate.
  3. Actively managed - Ability to make daily decisions in this fast-developing space vs. waiting for a quarterly or monthly index rebalance.
  4. No Derivatives or Tobacco stocks within the CNBS portfolio.
  5. Tim Seymour - Portfolio manager for CNBS, an experienced early-stage investor and recognized voice within the cannabis industry.

The ETF’s expense ratio comes in at 0.75%, tied with YOLO’s. Similar to YOLO, it can invest actively and be more nimble in the face of changing market conditions. Unlike YOLO, it vows not to go the derivative route to gain exposure to MSOs. Investors can take comfort in the fact that Amplify Seymour is taking a more cautious approach. And unlike MJ, it will not hold any non pureplay tobacco names.

Cambria Cannabis ETF (TOKE)

The latest entry in the cannabis ETF derby, launched on July 25th, is the Cambria Cannabis ETF (TOKE). The actively managed ETF represents Cambria’s first foray into thematic ETFs. Cambria’s founder, Mebane Faber, is the Portfolio Manager of the ETF. While he is a well-known trailblazer in the ETF industry, he has no known connection to the cannabis industry.

The biggest differentiator for this active ETF is its cost, coming in at an expense ratio of only 0.42%. The fund is targeting cost-conscious investors. Unlike YOLO and CNBS, it does hold tobacco names such as Philip Morris (PM) and Turning Point Brands (TPB).

How Do Investors Choose an ETF?

Owning a cannabis ETF offers investors diversified cannabis industry exposure through exposure to a basket of cannabis company names. It is much less risky than owing individual names. But given all these subtle differences between the cannabis ETFs on the market, it is important for investors to be aware of what each ETF owns and its unique attributes and differentiated investment approach.

We have put together a handy comparison matrix to help investors differentiate each ETF and choose the one that best matches their investment goals:

ETF Ticker

MJ

YOLO

THCX

CNBS

TOKE

Passive/Active

Passive

Active

Passive

Active

Active

Rebalance Frequency

Quarterly

As often as necessary

Monthly

As often as necessary

As often as necessary

Weighting Method

Market Cap

Discretionary

Market Cap

Discretionary

Discretionary

Expense Ratio

0.75%

0.74%

0.70%

0.75%

0.42%

PM Subject Matter Expert in Cannabis

N

?

N

Y

?

Use of Derivatives

N

Y

N

N

N

At least 80% in Cannabis Names

N

Y

Y

Y

Y

Tobacco Stocks

Y

N

N

N

Y

Legal Review

N

Y

Y

Y

Y

According to Grandview Research, the legal market for cannabis is expected to be worth $66.3 billion by 2025, growing at a CAGR of 23.9%. The good news for investors is that MJ finally has some ETF competition offering more pureplay exposure to capture the expected growth of this disruptive industry.

Disclosure

EQM Indexes is the creator of the EQM Global Cannabis Index (CANABIZ) referenced by the Amplify Seymour Cannabis ETF as an investment universe. EQM Indexes also supports Amplify ETFs with cannabis industry research and marketing content, such as infographics for compensation. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.