In a further sign that marijuana is no longer publicly taboo, another pot-focused exchange-traded fund—the second this month—launched on Tuesday with the debut of the Amplify Seymour Cannabis ETF (CNBS), a collaboration between Amplify ETFs and Tim Seymour, founder and chief investment officer of Seymour Asset Management and a co-host of CNBC’s Fast Money show.
Seymour will call the shots at this actively managed fund.
“For us, active is about being very plugged into an industry that’s evolving rapidly,” says Seymour, who has been an early-stage investor and advisor for various private cannabis companies. “That means not just the legislative and M&A climates because there’s a lot of capital markets activity in the sector, but also the evolution of the business where today’s leaders might not be tomorrow’s leaders. We plan to be actively engaging with management and making changes to the portfolio based upon our understanding of the sub-sectors within the industry.”
The CNBS fund invests at least 80% of its assets in companies that get at least 50% of their revenue from cannabis and hemp operations across three categories: cannabis/hemp plant (pharma and biotech, cultivation and retail, hemp products and cannabis-infused products); support (agricultural tech, real estate and commercial services) and ancillary (consumption devices, investing and finance, and tech and media).
Cultivation and retail comprises three-fifths of the portfolio. And like most of the other four U.S.-listed ETFs with a significant focus on cannabis, there’s a diverse capitalization exposure with a preponderance of small-cap and microcap companies. That’s not surprising, given the early-stage nature of this industry.
Cannabis Is Booming
In the U.S., medical marijuana is legal in 33 states and the District of Columbia, and recreational weed is legal in 11 states and in D.C.
Canada and Uruguay are the only countries with full federal legalization, while several other countries have legalized medicinal marijuana and other nations are exploring how they can hop on the legalization bandwagon.
According to Seaport Global Securities, today’s roughly $12 billion global cannabis industry could grow to $630 billion by 2040.
That said, marijuana in the U.S. remains a tricky business because it’s not federally sanctioned. As a result, many federally charted U.S. banks—including those serving as custodians that handle money and perform various back office chores for ETFs—were reticent to get involved in the marijuana sector.
But recent changes have helped grease the skids for three cannabis ETFs this year. Christian Magoon, founder and CEO of Amplify ETFs, says the Securities and Exchange Commission facilitated the flow when it said it would start approving cannabis ETFs that get a third-party legal opinion that clearly says the fund won’t own anything that’s operating against state or federal laws.
“With that, the custodians have started to ease up and are now willing to be custodians for cannabis ETFs,” says Magoon, adding that investment bank Cowen Inc. is the custodian for the CNBS fund.
“We wanted to work with Cowen because it’s the first Wall Street firm to have a cannabis research effort,” he says. “And they’ve been heavily involved in cannabis-related investment banking activity.”
Crowded Trade
Is the ETF marijuana trade getting crowded? Think about that for a moment . . . the fact this question is legitimate indicates how much the times are a-changin’.
As mentioned, there are now five U.S.-listed ETFs with a focus on cannabis. All of them invest primarily in Canada and the U.S., and all of them charge a net expense ratio ranging from 0.70% to 0.75% (the new CNBS fund is at 0.75%).
The largest in this group is the passively managed ETFMG Alternative Harvest ETF (MJ), which in December 2017 changed from being the Tierra XP Latin America Real Estate ETF (LARE) and almost immediately zoomed from being a $6 million fund to having north of $100 million in assets. It has continued to grow, and today has a little more than $1 billion in assets under management. Tobacco companies comprise 10 of the MJ fund’s 38 holdings, according to XTF.com.
The AdvisorShares Vice ETF (ACT), which launched in December 2017, is an active fund with a tri-focus on alcohol and tobacco (both sectors originally comprised about 40% of the portfolio mix) and cannabis (a roughly 20% weighting). Those percentages have changed over time as more cannabis-related companies entered the portfolio, but the fund continues to put a sizable emphasis on booze and smokes for their dividends and to act as ballast to offset the more volatile cannabis sector.
The three U.S.-listed cannabis ETFs that debuted this year are more pure plays on this industry. The AdvisorShares Pure Cannabis ETF (YOLO) launched in April and was billed as the first actively managed ETF focused solely on cannabis companies. The fund is run by the same team behind the ACT fund.
YOLO has garnered $58 million in assets versus just a tad less than $14 million for ACT, indicating that investors are more interested in the thrills and spills—and potential upside—of cannabis (again, this is a volatile sector) than the perceived stability offered by consumer staples companies in the alcohol and tobacco industries.
The Cannabis ETF (THCX) from Innovation Shares debuted on July 9 and is promoted as the first passively managed pure-play cannabis ETF. And now there’s the Amplify Seymour Cannabis ETF, which joins the YOLO fund in the actively managed pure-play cannabis arena.
That’s a varied list of marijuana funds for investors to choose from. But some observers wonder if the initial excitement over cannabis ETFs has faded. As a product provider specializing in thematic ETFs, that’s something Amplify ETFs is familiar with.
In January 2018, it rolled out the actively managed, blockchain-focused Amplify Transformational Data Sharing ETF (BLOK) on the same day as the passively managed, blockchain-focused Reality Shares Nasdaq NexGen Economy ETF (BLCN). These funds co-shared the honor of being first-to-market blockchain ETFs and were instant smash hits that both quickly topped the $100 million mark in assets. Two other blockchain ETFs that launched later that month generated less buzz and attracted far fewer assets. Today, BLCN’s asset base has shrunk to $71 million, while BLOK sits at $110 million as excitement about blockchain has subsided.
A blockchain fund that launched in May 2018, the REX BKCM ETF (BKC), closed earlier this year. That actively managed fund was a collaboration between exchange-traded product provider Rex Shares and Brian Kelly, a CNBC Fast Money correspondent and founder and CEO of BKCM Funds LLC.
Is The Demand There?
The cannabis space has been extremely volatile due in part to the iffy regulatory environment, as well as from news reports that the legalized recreational marijuana trade hasn’t lived up to the hype. For example, sales of recreational pot in Canada seriously undershot projections from October 2018 (when it was legalized nationally) through March. Sales picked up a little in April and May, but they’re still below expectations.
The culprit? The small number of licensed suppliers couldn’t meet demand, so potential customers relied on the black market for their weed. In addition, marijuana prices on the black market are much cheaper than prices at licensed retailers.
“The rollout in Canada has had some issues related both to supply and pricing, and some bottlenecks were created because they wanted be very slow and careful in how this was done on a province by province basis,” Seymour says. “Using that as a measure of overall Canadian demand isn’t a good read on that market.”
Naturally, both Seymour and the folks at Amplify are bullish on the long-term future of cannabis.
“I don’t have any question about the global consumption trend that’s happening,” Seymour says. “The story for the sector is about the crossover, and not as much about the existing user base. As you get into biopharma and the science of the canabanoid systems and their potential benefits for various diseases, I think this has massive upside potential.”
As Magoon points out, about 70% of all cannabis sales are related to medical uses.
But Seymour acknowledges the ride to weed-generated wealth could be bumpy for a while.
“Investors need to assess what’s an appropriate allocation for them to a higher-growth, higher-risk industry,” he says. “But make no mistake that for the foreseeable future cannabis will probably trade at a beta of one-and-a-half or two on the way up, and probably three-and-a-half to four on the way down.”