Marijuana ETF Folds Amid Uncertainty About Legal Weed

Regulatory hurdles are among reasons marijuana ETFs have flailed.

AdvisorShares, the largest marijuana ETF manager, said it’s closing one of its legal cannabis funds due to regulatory hurdles challenging the industry. 

The firm, which manages $1 billion in 22 exchange-traded funds, said it’s closing the AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) on Aug. 25. The fund has dropped 65% over the past year and its assets have fallen to $2.85 million. 

The ETF is at least the second marijuana ETF to close. In April 2022, the first mutual fund to cover to an ETF, the Cannabis Growth ETF (BUDX), closed after trading for about six months. 

The ETF was launched on the New York Stock Exchange in 2021 by siblings Morgan and Emily Paxhia during a boom period for the legal marijuana industry, when investors were enthusiastic to put their money into the growing sector through a diversified vehicle.  

“While we continue to see a bright future for this industry, PSDN fund is not immune to the broader macroeconomic environment and, more specifically, to the dramatic shift in investor sentiment that has impacted cannabis industry,” fund co-founder Morgan Paxhia said in an interview. 

Noah Hamman, CEO of AdvisorShares, primarily attributed the fund’s closing to the challenges that come with raising assets for smaller ETFs: “For the most part, it doesn’t have to do with the industry, it’s a financial decision.” 

Marijuana ETFs Down 

The biggest fund in the sector, the AdvisorShares’s Pure US Cannabis ETF (MSOS), is also down 60% from this time last year. And the ETFMG Alternative Harvest ETF (MJ), which was at the center of an SEC probe into ETFMG’s Sam Masucci’s conduct relating to the fund, is down 50% over the past year.  

The closure of Poseidon’s ETF and the broader investor exodus from the sector point to a challenge with thematic ETF investing, Todd Sohn, ETF strategist at Strategas Securities, told etf.com.  

“You can like the story, but there are always hurdles along the way,” he said. “You can sit and wait for the story to translate into actual returns, and with these cannabis funds, it just hasn’t happened.” 

The cannabis industry has faced an array of regulatory challenges that have hampered the sector’s growth, the foremost being that marijuana is illegal at the federal level.  

Roughly half of U.S. states have legalized recreational cannabis use, but because it is classified as a Schedule I substance on the federal level, the industry cannot access many banking services or conduct business across state lines. To comply with federal law, Mastercard decided last month it would stop allowing marijuana transactions on its debit cards. 

Hamman argued that for the cannabis industry to start performing better in the market, there will need to be legislation that allows the industry to operate federally: “The real growth opportunity ahead is absolutely federal policy change.”  

There is hope for federal-level reform to help the industry grow, despite the legal challenges, but there is no clear timeline of when that may happen.  

Some of PSDN’s challenges go beyond the industry. Sohn noted that this year’s macroeconomic conditions have driven investors to booming AI thematic ETFs and tech equities, which have outpaced the S&P 500. It’s possible some investors have abandoned the once-flashy cannabis sector for a new one that seems cutting edge. 

Contact Lucy Brewster at [email protected]