5th Marijuana ETF Debuts

Bargain price tag helps Cambria's fund stand out in a crowded field.

Reviewed by: Lara Crigger
Edited by: Lara Crigger

Today Cambria launched the fifth marijuana ETF, the Cambria Cannabis ETF (TOKE), the cheapest such fund on the market by a significant margin.

TOKE charges an expense ratio of just 0.42%, after the application of a yearlong fee waiver. That's almost 30 basis points below its nearest competitor, The Cannabis ETF (THCX), which costs 0.70%.

Active Management In Cannabis

TOKE launched just two days after Amplify ETFs brought its Amplify Seymour Cannabis ETF (CNBS) to market (read: "Another Cannabis ETF Debuts").

Like CNBS, TOKE is an actively managed fund. Similarly to other funds in the space, Cambria defines cannabis equities as companies that generate 50% or more of revenue or profits from legal cannabis-related activities, including:

  • The legal production, cultivation and/or sale of cannabis, or support thereof
  • Lawful research into medical and pharmaceutical applications of marijuana and cannabis extracts
  • Development and production of devices, goods and equipment related to the cannabis industry, including hemp

The fund may also invest in forward-looking cannabis plays, such as tobacco and alcohol stocks.

Global Play, No Swaps

TOKE invests in securities from around the world, including at least 25% in Canadian companies and a "significant portion of its assets" in Australian, European and Asian-domiciled companies.

"The largest cannabis consumers are in Asia and Africa," said Mebane Faber, TOKE's portfolio manager and CIO for Cambria Investments. "Certainly the U.S. is a big market, and Canada was the pioneer, but moving forward, we expect major players to develop all over the world."

For U.S.-based companies, TOKE will only invest in companies whose business activities are legal at both the state and federal level.

Cambria has no plans to invest in the swaps contracts of multistate operators, as does a competitor fund, the AdvisorShares Pure Cannabis ETF (YOLO). That is because Cambria historically does not use swaps contracts in its ETFs, explains Faber.

Though no specific rebalance schedule is listed in the prospectus, it will occur no less frequently than annually.

TOKE Will Loan Securities

Interestingly, TOKE will engage in the practice of securities lending, where ETF issuers lend out shares of the underlying securities to short-sellers, and in fact, Faber expects to generate significant revenue from the practice.

Cambria started securities lending in its ETFs earlier this year.

"Short lending can generate quite a bit of revenue to shareholders for funds where there's a lot of growth and speculation, and cannabis is certainly one of them," said Faber.

CNBS, THCX, YOLO and the ETFMG Alternative Harvest ETF (MJ) also all practice securities lending. Last year, MJ made $2.9 million in securities lending income, or 0.4% of total net assets for the year.

Custodian Bank Providing Custody

TOKE had been in registration for almost two years prior to launch, as Cambria searched in vain for a service provider to custody marijuana stocks on behalf of the fund. However, attitudes have recently shifted within large ETF custodian banks (read: "Challenge Of Launching Cannabis ETFs").

"I think it's entirely sensible from the custodian's standpoint," said Faber. "The rules are changing every day. To be cautious is the right way to go about it."

Brown Brothers Harriman serves as the custodian and transfer agent for TOKE.

Thematic 1st For Cambria

TOKE is Cambria's first thematic ETF. The firm was attracted to the idea by the "structural and behavioral bias" that persists in the cannabis industry, says Faber.

"There tends to be a fair amount of froth in the valuations of these companies, but over 10-year time horizons, there are plenty of arbitrage opportunities," he added.

"We're in this for the long haul. We don't think we're chasing a hot fad,” Faber noted. “This is something I think is a 10-, 20-year play."

TOKE is listed on Cboe Global Markets, parent company of ETF.com.

Contact Lara Crigger at [email protected]

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