The Summer of ’19 has been an up-and-down season for marijuana exchange-traded funds. On the up side, three U.S.-listed cannabis ETFs launched in July. On the down side, the share price of these and the other two U.S.-listed pot-focused ETFs have been riding a southbound train that has taken them into negative territory so far this quarter.
With summer’s end in sight, get ready for another pot ETF after AdvisorShares this week filed with the Securities and Exchange Commission for the AdvisorShares Pure US Cannabis ETF (MJUS), which would be the first ETF to focus on the U.S. cannabis trade.
MJUS is an actively managed product with the same management team that's behind the AdvisorShares Pure Cannabis ETF (YOLO). That fund launched in April and was the first actively managed ETF to invest solely in cannabis-related companies.
Like the other U.S.-traded cannabis ETFs on the market, YOLO’s portfolio is dominated by a mix of companies listed in Canada and the U.S. MJUS plans to hold companies that get at least 50% of their net revenue from the marijuana and hemp business in the U.S. across a range of sectors and industries including agriculture, biotechnology, finance, pharmaceuticals, real estate and retail. For regulatory reasons, AdvisorShares can't comment on the fund's potential portfolio, so it's unclear whether fund constituents will be solely U.S.-based or will also include Canadian companies with sizable operations in the U.S.
For now, AdvisorShares says that MJUS will be a "U.S.-centric" product.
According to its SEC filing, the fund “will invest in exchange-listed equity securities, including common and preferred stock, of mid- and small-capitalization companies, and in derivative instruments intended to provide exposure to such companies. As part of that strategy, the fund will use total return swaps, index swaps, equity basket swaps, and/or futures.”
The use of swaps are a way to gain indirect exposure to U.S. companies with cannabis operations that are legal in certain states but not legal at the federal level. This strategy is not without controversy. All cannabis ETFs have to provide legal opinions to the SEC on what they can and can’t own, and that excludes companies with operations that violate federal laws.
The NYSE and Nasdaq don’t list U.S. pot growers because marijuana isn’t federally sanctioned in this country. As a result, these companies are listed on exchanges in Canada where weed is federally legal.
In July, AdvisorShares released a press statement announcing that YOLO added exposure to cannabis multi-state operators, or MSOs that are U.S.-based companies directly involved in the legal production and distribution of cannabis in states where it's approved.
Holding swaps in these MSOs gives YOLO indirect exposure to companies the fund can’t own directly—i.e., those with operations in violation of federal marijuana laws.
Some critics contend that raises the potential for law enforcement actions and fines. YOLO is the second-largest U.S.-traded cannabis ETF with assets of $55.8 million.
Summer Of Unlove
Continued regulatory uncertainty and other issues have provided a steady stream of bad news that has fueled the cannabis sector’s summer slump. The negative headlines have included scandals involving unlicensed growing at CannTrust, upheaval when market leader Canopy Growth removed its high-profile CEO, and an FDA warning letter to Curaleaf for making unsubstantiated health claims and for misbranding their products as drugs.
In addition, investors have been spooked about reports that sales of legal recreational weed in Canada have been significantly below expectations since it was federalized there last October.