- The 2019 actively managed cannabis ETF was one of the first to provide investors long risk exposure to the ever-popular marijuana democratization play.
- The inauguration of a cannabis friendly Democratic administration provided tailwinds for underlying securities to fly.
- Increasingly, it seems however that cannabis friendly policy has been priced in.
- Developments in interest rates have forced investors to scrutinize company financials more closely.
- Additionally, lucrative thematic expense ratios continue to attract competition from other fund houses.
Cannabis appears to have fallen off the radar. At least, that is perchance what mainstream financial infotainment would have you believe. It has been a while since storied cannabis ventures were showcased like they were during several widely covered public flotations.
Of course, the cannabis space is alive and well – the firms have not gone away but may have taken back seat, at least in the media, to vaccine roll outs, interest rate movements and imminent government policy.
The good news is that both remarkable progress in vaccine roll outs and Biden administration policy are likely to be positive for both retail and industrial cannabis segments. The bad news is that characteristics of the industry have not meaningfully changed - an adverse interest rate environment is evolving along with a potential political bun fight to get legislation passed.
While these factors may not wholeheartedly explain some of the price-action we have seen in the cannabis themed ETF space, undoubtedly, they have made some form of contribution as the category undergoes a degree of obvious consolidation. Numerous marijuana ETFs have pulled off their highs as investors come to grips with an increasingly reflationary environment which adversely impacts both big-narrative growth plays and long bonds.
For the fervent cannabis investor looking to take on exposure, changes in interest rates are something to carefully look out for, particularly for an industry which has gorged itself on cheap debt and lose money on a never-ending quest for growth.
Widespread societal acceptance of cannabis is becoming a growing global phenomenon.
The growing popularity of the “cannabis democratization” trade has attracted increasing attention from fund houses. Thematic investment plays dressed up as ETFs remain extremely lucrative for fund managers and popular often for investors wishing to embrace a social theme or set of values in the investment choices they make. This itself has spurned the ESG revolution highlighting the importance more informed investors place on social impact of their trades.
And along comes (NYSEARCA:YOLO) – one of the O.Gs in the broad cannabis ETF market. Among the pioneers in cannabis investing, the product has caught investor attention – not only due to AdvisorShares’ track record of bringing to market and managing exciting ETFs but also due to its catchy ticker - YOLO often more readily used jargon to describe hitting home runs on over leveraged option plays rather than a long-term passive investment. Maybe YOIO (You Only Invest Once) would have been more fitting. Neutral.
Source: Market Chameleon
AdvisorShares Pure Cannabis ETF is exactly just that – a pioneering pure play marijuana set-up allowing investors to take on risk exposure to this growing industry without necessarily doing the individual stock picking groundwork. The fund is actively managed with Dan Ahrens doing a commendable job in handpicking underlying assets – primarily small to mid-tier companies which generate 50% of revenues broadly through cannabis and marijuana trade.
It is not the only marijuana focused ETF the fund manager actively promotes – both (VICE) and (MSOS) compliment AdvisorShares product range while covering specific niches. Regarding YOLO, key attributes include dedicated cannabis exposure to consumer products, emerging growth characteristics of the underlying securities and market consolidation potential (merger & acquisition targets)
A key theme YOLO emphasizes is the parallel with the post prohibition era where societal, business, and legislative changes formed the perfect storm, allowing for compelling long-term growth opportunities thereafter.
1-year total returns for YOLO have been among the best in class with the fund having delivered +216.29% during the period. This compares with (CNBS), the only fund to have outperformed (+241.31%). Both funds, leaders in the segment, convincingly outpaced the peer group (MJ) +104.93%, (TOKE) +104.82%, (VICE) +83.86% and (MSOS) +74.02%. Overall growth for the sector was explosive to say the least, with thematic cannabis plays outpacing all main indexes.
More recently however, we have seen the cannabis space trade sideways as changes in interest rates force a rethink of portfolio composition and investors rotate back into boring, summary yet dependable, established household names.
YOLO has a 3-pronged bottom-up approach to security identification which embraces the fund’s investment goals – invest in long-term growth opportunities with significant upside potential, a leadership edge and potential to benefit from industry consolidation.
YOLO is predominantly exposed to mid to small tier firms with a clear focus on North America. Both Canadian and US equities play a prominent role in the fund’s make-up. About 3.6% of the fund’s circa $400M in assets under management is held as cash at any one time, providing the fund manager with the flexibility to actively manage the portfolio.
80% of the funds underlying holdings is made up of a range of securities – both equity and derivatives which emulate underlying equity price action – to meet investment objectives. While the underlying securities remain distinguishable, it is worth highlighting a few common traits:
- The high octane growthy nature of the different companies
- The comparably abundant use of leverage to deliver returns
- The marked absence of net income
Source: Spreadsheet developed by author via data supplied by Seeking Alpha.
Across the main holdings, median growth rates were impressive – clocking in at +102.25%. Debt played a meaningful role in investment returns with a median total debt to equity ratio of +34.86%.
Notably, net income was a relatively common absentee in many of the underlying income statements, with trailing twelve-month net income coming in around -4.93%.
Principally, no earnings are not a big issue – specifically given that most of these firms find themselves in the nascent stages of the business cycle. Nonetheless, it is something investors need to be cognizant of, particularly if changes in the business environment implies greater difficulty in financing operations, either through debt or equity.
YOLO is a well-established, professionally managed, thematic ETF. Accordingly, a lot of the product traits relate directly to either the exotic nature of the package (thematic ETFs), its active management thoroughbred, and cannabis equity market characteristics. Like its cousins (VICE) and (MSOS), the ETF positions itself on the higher side with regards to expense fees which reflects both costs associated with professional active management and the specialized nature of the expanding marijuana industry.
The product remains one of the niche pioneers, with only sister product (VICE) and ETF Managers (MJ) being older offerings. Undoubtedly, AdvisorShares is one of the references in the segment given the number of products it has brought to market along with time served on it.
Fund inflows appear to have stagnated or somewhat decreased (-$40M) since I last covered the ETF indirectly in a post reviewing its competitor (CNBS). An options market does exist for the ETF which is a big positive as it allows investors to protect gains by taking long positions in puts or by selling calls in a sideways market.
As we most recently witnessed, the consolidation phase we have had over the past 3 months is ideal call selling territory, and the fact that options exist would have allowed investors to increase active returns by selling premia.
Source: Spreadsheet developed by author with data from ETF.com
Holdings for the entire segment gyrate between 20 and 30 securities per ETF, which also reflects the evolving nature of this fledgling industry. There are not 10,000 securities to choose from, so it is a tribute to the package’s active management that the fund managed to deliver a solid return profile with essentially the same basket of securities to choose from as competing offerings.
It is worth highlighting that YOLO does have recourse to the OTC derivatives market, allowing greater flexibility for the fund manager, but also creating an additional layer of risk for the security holder (counterparty risk).
All in all, difficult to fault the package – mid range in terms of size, top end in terms of expenses – reflective of specific product attributes and best in class in terms of track record.
- YOLO is AdvisorShares mid-range product, smaller than sister offering (MSOS) yet substantially bigger than (VICE), it is one of the pioneer cannabis themed exchange traded funds.
- Its purpose is to allow investors to take on long risk for emerging growth plays in the marijuana industry – premised on actively handpicking best in class underlying firms exposed to the democratization of the cannabis trade and possibly exposed to long-term merger and acquisition activity.
- Dan Ahrens is the products active manager – he has a commendable track record of engineering, marketing, and managing cannabis themed funds.
- Returns have been superlative, with the fund hitting a home run over the past year, clocking +200% over the period.
- The ETF focuses on mid to large cap North American firms – traits which underlying corporations share include high octane, explosive growth married to copious amounts of debt and the absence of profitability.
- While underlying attributes like these are not an issue in themselves, and can be explained by the nascent cannabis industry, investors need to be privy of the risks, particularly if lasting changes in the business environment come into play.
- Broadly speaking, a Biden all-out push to democratize cannabis will provide product tailwinds perchance muted by the administration’s difficulty in passing never ending stimulus deals turbo-charged through increases in corporate tax rates.
- The fiscal environment coupled with rising interest rates could prove to be kryptonite for an industry founded on cheap debt, endless capital, and enduring narratives.
While it remains difficult to fault YOLO holistically, I remain neutral regarding the package. Not because it is poorly designed, marketed, or managed, but rather because it has seen the light in an environment where investment fads can be fleeting, the business environment ever changing and recourse to capital markets increasingly complicated.
Any portfolio of hyper-leveraged firms, subject to the whims of investors turning a blind eye to earnings in exchange for an enduring growth narrative, can quickly move South should we see radical changes in interest rates and an eventual rotation back into boring household names which can stand-up more robustly to more challenging capital environments.
This article was written by
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