Somewhere up there (or down there, depending on your perspective), the late psychedelics guru Timothy Leary is smiling regarding the recent launch of the Defiance Next Gen Altered Experience ETF (PSY), the first U.S.-listed fund that taps into the nascent medicinal psychedelics market.
A growing body of scientific research points to the potential benefits of using psychedelics such as LSD, psilocybin (the element that powers “magic mushrooms”) and MDMA (the short-hand name for the chemical also known as ecstasy) to treat depression and post-traumatic stress disorder. The new PSY fund from Defiance ETFs tracks the BITA Medical Psychedelics, Cannabis, and Ketamine Index comprised of about 20 companies that get at least half of their revenue from activities related to psychedelics, cannabis and ketamine for medical purposes.
Ketamine is used in anesthesia, is an effective pain reliever when dispensed in low doses, and is now available in a U.S. Food and Drug Administration-approved product to help fight depression. But its hallucinogenic properties make it a recreational drug, and it can relax the body to such an extent that its misuse has been associated with date rape. As quoted in a published article a few years ago, John Abenstein, a Mayo Clinic anesthesiologist and former president of the American Society of Anesthesiologists, described ketamine this way: “Outside of the clinic, ketamine can cause tragedies, but in the right hands, it is a miracle.”
That summarizes the delicate balance involving substances that can both aid human health and titillate recreational drug users—or abusers. And that’s reflected in how the federal government regulates them.
Under the Controlled Substances Act, ketamine is a Schedule III drug that’s approved for medical purposes and is deemed to have moderate to low potential for physical and psychological dependence. LSD (lysergic acid diethylamide), psilocybin, MDMA and cannabis, on the other hand, are classified as Schedule I drugs with no currently accepted medical use and a high potential for abuse. It’s illegal to possess or distribute Schedule I drugs.
Of course, cannabis has been undergoing a regulatory sea change at the state level thanks to the growing acceptance of its palliative benefits for physical ailments. And it’s also gaining favor with state governments that see recreational marijuana as a potential financial jackpot. All of this is germane to the PSY fund, which despite its headline-grabbing psychedelics focus still has a heavy cannabis tilt. As such, its performance will likely depend in part on the vagaries of the marijuana trade until psychedelics become a bigger part of the portfolio.
As of mid-May, 36 states and four territories had approved medicinal marijuana use, according to the National Conference of State Legislatures. And 17 states, two territories and the District of Columbia had approved its recreational use. (These numbers are pending various court cases.)
To account for the fact that federal law still blacklists marijuana, the handful of U.S.-listed cannabis ETFs get around that largely by investing in Canadian-listed cannabis companies and/or in multistate operators, or MSOs, which are U.S.-based companies directly involved in the legal production and distribution of cannabis in states where it's approved. The major U.S. securities exchanges don’t list MSOs because they don’t want to run afoul of U.S. law, so MSOs are relegated to trading on the OTC market in the U.S. and/or on the Canadian Securities Exchange, an electronic stock exchange for micro-cap and emerging companies.
Nearly two-thirds of the PSY fund’s overall portfolio weighting by subsector is linked to the cannabis industry, and Canada is the portfolio’s largest country weight at almost 75%. But it’s the fund’s 35% psychedelic portion that sets it apart from the other U.S.-listed cannabis ETFs.
That portion includes a position in Compass Pathways, a British mental healthcare company with a patented synthetic form of psilocybin for use as an antidepressant. The company began trading on the Nasdaq market last October.
Another PSY portfolio company is MindMed, a developer of psychedelic-based therapies involving LSD, psilocybin, MDMA and DMT. DMT, or N,N-dimethyltryptamine, is a hallucinogenic substance found in certain trees that has long been a mainstay used by shamans in indigenous religious ceremonies in South America. MindMed is involved in Phase 1 clinical trials to test the potential therapeutic benefits of DMT. In a press release, it noted that non-clinical, anecdotal evidence suggests DMT could help address addiction disorders.
The New York City-based biotech company began trading on the Nasdaq in late-April.
“The reality is that psychedelic companies are a lot easier [for fund providers to invest in] than cannabis companies because many of the latter do both medicinal and recreational, which is where you get the hang up with the federal government,” said Paul Dellaquila, president of Defiance ETFs. He added that products created by psychedelic therapy companies are used in strictly controlled environments for medicinal purposes only.
Legend Of A Mind
Timothy Leary, the famed LSD and counterculture proselytizer, initially deployed the use of psychedelics as part of his early-1960s research at Harvard University’s psychology department. He and his associate were later fired after university officials questioned the rigor of their research and their methods for getting test subjects. The reputation of psychedelics has been tainted by their use—or misuse—for recreational purposes, part of which was fueled by Leary's advocation in the '60s to take psychedelics and "tune in, turn on and drop out." Nonetheless, the therapeutic potential to treat mental illness with psychedelics has been known for decades. And the clinical evidence for their efficacy has been gaining momentum, as a greater number of medical professionals, including researchers at Johns Hopkins University, have become big boosters of the use of psychedelics to remediate mental health conditions.
Meanwhile, some big pharma companies have hopped on the psychedelics train. Johnson & Johnson, for example, won approval two years ago to sell Spravato, a ketamine-derived nasal spray for depression. And there are several Phase 3 clinical trials being conducted under the FDA’s scrutiny involving psychedelic treatments for mental disorders.
Dellaquila said J&J isn’t in the PSY fund’s portfolio because the company's psychedelic therapy-related work is a drop in its overall revenue bucket. “We’re trying to create a more pure portfolio containing companies that are truly developing and benefitting from treatments in this space,” he noted.
But J&J is a holding in the Horizons Psychedelic Stock Index ETF (PSYK), a product that launched earlier this year and trades on the NEO Exchange in Canada. It tracks the North American Psychedelics Index containing U.S. or Canadian publicly listed life sciences companies that conduct research and make psychedelic medicines, or are part of the supply chain for psychedelic medicines.
It has roughly $62 million in assets, and its net expense ratio of 0.85% is 10 basis points more than the fee on the Defiance Next Gen Altered Experience ETF. The share price of the Horizons product is down 19% since it debuted in January.
The psychedelics therapy market is in the early stages, and that puts it in Defiance ETFs proverbial wheelhouse because the company tends to gravitate toward early-in-the-game opportunities. The New York City-based ETF provider introduced its first product in 2018, and now offers seven funds—some of them in intriguing, cutting-edge fields such as quantum computing and hydrogen energy that offer potentially big payoffs.
But Dellaquila believes that J&J’s existing psychedelic therapy for depression, combined with the Phase 3 trials currently involving various treatments from different companies, indicates the future is now, or at least in the very near-future, and that psychedelic pay dirt will come sooner than later.
“It might be a little early, but we think it’s something with massive upside,” he said.