Leveraged Cannabis ETN Launches

December 11, 2019

On Wednesday, Dec. 11, REX Shares added two marijuana-focused products to its MicroSectors lineup of ETNs, including the U.S.' first leveraged cannabis exchange-traded product.

The MicroSectors Cannabis 2x Leveraged ETN (MJO) and the MicroSectors Cannabis Index ETN (MJJ) are unsecured senior debt obligations issued by the Bank of Montreal.

Both notes will trade on NYSE Arca, and are set to mature in 2039.

MJJ will cost 0.70%, while MJO will cost 0.95%. MJO is also subject to a daily financing charge that is based on the current U.S. federal funds rate plus 1.25%.

An Index Of Pure & Quasi Plays

MJJ will track the Indxx MicroSectors North American Cannabis Index, while MJO will seek to provide 2x leveraged exposure to the same index. (As with all leveraged products, MJO's exposure to its index will reset on a daily basis; as such, the note is designed for short-term trading only, not buy-and-hold investment. For more, read: "ETF Education: The Problem With Inverse/Leveraged ETFs.")

The ETNs' benchmark tracks U.S. and Canadian stocks selected across five subthemes: cultivation, pharmaceuticals, testing and analytics, industrial hemp and ancillary products.

Constituents are classified as pure-play if they derive 50% or more of their revenue from cannabis-related business activity, and quasi-plays if below 50%. Individual securities are capped at 9.9% of the index and are subject to size and liquidity constraints.

Capturing The Entire Ecosystem

On a quarterly basis, new listings (such as spin-offs and IPOs) are evaluated for inclusion in the index, while existing constituents are reviewed for their exposure to regulatory and lawsuit risk and removed from the index accordingly.

The index is rebalanced monthly and reconstituted once annually.

At launch, the index tracked 23 stocks, including many well-known cannabis plays like Tilray (TLRY) and Innovative Industrial Properties (IIPR), while also expanding into less pure-play names, such as Scotts Miracle-Gro (SMG) and AbbVie (ABBV). (Note: As debt notes, ETNs do not actually hold any physical stocks.)

Cannabis "is an emerging industry that has been headline-driven and very heavily traded on a single stock basis," Scott Acheychek, president of REX Shares, told ETF.com, adding that "there has been a gap in the existing leveraged product space when it comes to cannabis."

No Strangers To ETNs

Designed for short-term traders and hedgers, the MicroSectors ETNs are all highly concentrated, narrow thematic ETNs whose indexes tend to track only a handful of names. Currently there are MicroSectors ETNs tracking "big oil," "big banks," MLPs and the FANG stocks (such as, Facebook, Alphabet, Amazon and Netflix.)

REX Shares launched its MicroSectors ETNs in 2018 with its MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) and MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD), which now have $152 million and $14 million in assets under management, respectively.

Today, the brand has 18 ETNs under its umbrella, including its two new cannabis ETNs, and $691 million in assets under management.

Contact Lara Crigger at [email protected]  

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