Remember when cannabis-focused exchange-traded funds were all the rage and generated tons of excitement? Seven of the nine exchange-traded products (two are exchange-traded notes) in this space came to market in 2019 amid a lot of hype, but five of the six products with one-year track records have registered losses ranging from 29% to 47% during that period.
The exception among them is the AdvisorShares Vice ETF (ACT), which was up nearly 13%. But this fund is a different animal in that only about 40% of its portfolio is exposed to companies with significant cannabis-related revenue. Other sectors in this fund—specifically, alcohol and tobacco—have provided a buffer against the vicissitudes of the marijuana market.
The point is that the cannabis industry has been a downer for investors. Why? Well, let’s count the ways.
According to various published reports, the reasons include lower-than-expected demand in the legal recreational market while black-market sales thrive, particularly in Canada, which legalized recreational pot nationally in October 2018 but has subsequently experienced an uneven rollout across the country. And many big-name companies in this industry have experienced rising operating costs, falling margins and depleted cash reserves, which has turned off investors.
Elsewhere, and this is a biggie, a cloud of regulatory uncertainty hangs over the cannabis industry. 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. But the U.S. government classifies cannabis as a Schedule 1 drug (i.e., those having no currently accepted medical use and a high potential for abuse). As such, banks are wary about doing business with companies involved in cannabis, making it hard for companies to get funding. And some custodians are leery about letting their customers trade stocks whose operations run afoul of federal law.
Add it up, and it seems like daunting days for the cannabis industry, which makes this week’s launch of the actively managed AdvisorShares Pure US Cannabis ETF (MSOS) seem like a contrarian move. Or worse, ill-timed. But the fund’s portfolio manager, Dan Ahrens, posits that the cannabis trade oozes with potential and that investors have focused too much on Canada’s cannabis problems while ignoring the vast potential of the U.S. market. The MSOS fund is the first pot ETF geared specifically toward companies serving the U.S. market.
“There are a lot of tailwinds for U.S. cannabis,” Ahrens said. “The U.S. market is at least 10 times the size of the Canadian market. Single states like Colorado and California and Illinois are each on their own a bigger market than Canada.”
Another potential plus for the U.S., he added, is the widely expected belief that additional states will come online in the next year after the November election.
“States that don’t currently have legal marijuana sales might be adding medical marijuana, and states that have medical marijuana now might be moving to recreational use,” Ahrens said. “That’s potentially a huge market upside.”
The MSOS fund invests in the securities of—or uses derivatives tied to—companies that derive at least 50% of their net revenue from the marijuana and hemp business in the U.S. The fund’s net expense ratio is 0.74%.