Cutting Through The Hype
Ahrens is no stranger to the cannabis sector. He’s the portfolio manager of the aforementioned AdvisorShares Vice ETF, which launched in late 2017, as well as the AdvisorShares Pure Cannabis ETF (YOLO) that began trading in April 2019. Both are actively managed, and whereas the former is intended to be a mix of cannabis, alcohol and tobacco companies (the latter two sectors are deemed as less-volatile dividend plays meant to add ballast to the portfolio to counteract the volatility of the cannabis sector), YOLO was the first actively managed ETF to invest solely in cannabis-related companies. All of its holdings are listed in either the U.S. or Canada. That includes overseas companies, such as U.K.-based GW Pharmaceuticals, that trade in this country as an American depositary receipt.
In fact, YOLO was just the second U.S.-listed ETF focused on marijuana. The first was the ETFMG Alternative Harvest ETF (MJ), an index-tracking product that converted from an existing Latin America real estate fund into a cannabis fund in December 2017.
According to its prospectus, the fund’s underlying index excludes companies whose business activities are legal under state cannabis laws but not legal under federal cannabis laws. The types of businesses that can be included in the portfolio range from pharmaceutical companies to those that aid in the legal cultivation of cannabis.
Other ETFs in this category take a similar tack, giving them significant exposure to large Canadian growers that might be U.S.-listed but which serve the Canadian market only, not the U.S. medical or recreational market. And some of these companies have stumbled for various reasons since they made splashy debuts on the public market.
“The mainstream media and individual investors have been way too focused on the Canadian market and on the big four in Canada comprising Canopy [Growth], Tilray, Aurora [Cannabis] and Cronos [Group],” Ahrens said. “All four of those are wildly unprofitable.”
He posited that when the cannabis craze was in full bloom during late-2018 and early-2019, cannabis stocks traded too much on hype and future expectations rather than on their financials, balance sheets or their ability to become profitable.
“With cannabis, investors need a lot more awareness and education that not all cannabis investments and cannabis ETFs are created equal,” Ahrens said, adding that other ETFs are missing the boat by ignoring companies that operate in the U.S.
“That’s why we launched a new fund, MSOS, that’s U.S.-only focused,” he said.
Regulatory Balancing Act
But launching the fund wasn’t easy due to the regulatory tightrope that comes with trying to invest in companies serving the U.S. market. Last August, AdvisorShares initially filed with the Securities and Exchange Commission for approval for the AdvisorShares Pure US Cannabis ETF, which then had a different ticker symbol, MJUS.
The sticking point was that this fund, now trading under the MSOS ticker, gets exposure to the U.S. cannabis market via 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. Leading companies in this space include Curaleaf Holdings, Green Thumb Industries, Trulieve Cannabis and Cresco Labs.