1st US Focused Cannabis ETF Proposed

1st US Focused Cannabis ETF Proposed

AdvisorShares' prospective fund would use same derivative strategy as 'YOLO.'

Reviewed by: Lara Crigger
Edited by: Lara Crigger

AdvisorShares, the issuer behind the second biggest marijuana ETF on the market today, has filed for a second actively managed cannabis fund: the AdvisorShares Pure US Cannabis ETF.

The prospective fund, which would trade on the NYSE Arca under the ticker "MJUS," would be the first fund to concentrate entirely on U.S. cannabis companies, which are defined in the prospectus as companies deriving at least 50% of their revenues from marijuana or hemp business within the U.S.

In addition to holding stocks, MJUS would use derivatives to gain exposure to certain otherwise-inaccessible marijuana stocks, similar to the strategy used by its sister fund, the $56 million AdvisorShares Pure Cannabis ETF (YOLO).

Swaps: Controversial Cannabis Strategy

Marijuana remains illegal at the federal level in the U.S., making it difficult for cannabis ETFs to obtain exposure to the rapidly expanding and evolving U.S. market (read: "Challenge Of Launching Cannabis ETFs").

MJUS' predecessor, YOLO, addresses this issue, by holding swap contracts of U.S. multistate operator firms as well as for foreign companies of uncertain legality, such as GW Pharmaceuticals. This avoids direct ownership of the stocks that give regulators and YOLO's custodian pause, while also giving the fund exposure to segments of the U.S. market that other marijuana ETFs don't access. As of Aug. 20, swap contracts comprised 16.8% of YOLO's portfolio.

Critics say the use of swaps introduces derivatives and counterparty risk into a fund that already covers a high-risk market segment. It is also unclear whether the SEC, which is a federal agency, will continue to approve the usage of swaps to access U.S. companies that are legal at state, but not federal, level.

Swaps are also illiquid instruments, and may be a contributing factor in YOLO's wide trading spreads (read: "Why Cannabis ETF Spreads Are So High").

However, investors don't seem particularly concerned by YOLO's derivatives usage. Since its launch, YOLO has brought in roughly $70 million in new net assets. That is more inflows than the current market leader, the $941 million ETFMG Alternative Harvest ETF (MJ), which has brought in $66 million in the same period.

MJUS: US Focus

According to the filing, MJUS would focus on companies in a wide range of sectors, including agriculture, biotech, pharmaceuticals, real estate, retail and finance.

Intriguingly, the "agriculture" provision could make MJUS the first cannabis ETF to potentially gain exposure to U.S. marijuana growers; however, this provision more likely refers to hemp agriculture, which was made legal in the U.S. after Congress passed the 2018 Farm Bill. (AdvisorShares was not immediately available for comment. We will update the article when we hear more.)

The advisors may also invest in forward-looking cannabis plays and companies currently registered with the Drug Enforcement Agency to use marijuana for medical research and development. At least 25% of the fund will concentrate in the health care sector.

No expense ratio was listed in MJUS' prospectus.

Contact Lara Crigger at [email protected]

Lara Crigger is a former staff writer for etf.com and ETF Report.