Cannabis Mutual Fund Converts To ETF

A new cannabis ETF hit the market Monday morning after converting from its original mutual fund wrapper.

The Cannabis Growth ETF (BUDX) is now trading on the NYSE Arca, two years after its original debut as the Cannabis Growth Fund (formerly CANIX). The fund’s sponsor, Foothill Capital Management, first made its conversion plans public in a U.S. Securities and Exchange Commission filing in June.

The actively managed BUDX is keeping its investment strategy of buying companies directly engaged in the cannabis industry, along with biotechnology and agriculture companies that derive revenue from the industry.

However, its expense ratio is dropping from 1.24% to 0.65% for the first year of trading before a waiver of 14 basis points for acquired fund fees expires. Its full expense ratio of 0.79% makes it just slightly more expensive than the 0.75% that is typical among existing cannabis ETFs.

Shelf-Space Struggle

In an interview, Foothill Capital Management Managing Director Max Banhazl said the mutual fund was struggling to get shelf space on multiple securities broker platforms, leading to the relatively small asset under management figure of $3.9 million.

“We had some luck getting added to the TDAmeritrade and Vanguard platforms, but the Schwabs, Fidelitys, e-Trade, now Robinhoods of the world that only do stocks and ETFs? Schwab just would not onboard a small new … mutual fund like ours,” he said.

The prospect of heavyweight asset managers converting mutual funds into ETFs has gained significant traction this year, with Dimensional Fund Advisors switching $29 billion in assets between the two wrappers in June, and J.P. Morgan announcing plans to convert $9.7 billion in assets next year.

Banhazl was part of the first-ever mutual-fund-to-ETF conversion as a vice president of Mutual Fund Administration LLC, which was connected to Guinness Atkinson’s conversion in March of two mutual funds with about $30 million in assets at the time.

That first conversion laid out a framework that made converting CANIX far easier, he said.

“Speaking of the legal aspects, the shareholder issues, fractional [shares], all these things that come about when you talk about converting an open-end mutual fund to an ETF, it absolutely made this process a little bit more streamlined, because the model was already built,” he said.

CANIX has posted year-to-date returns of 7.7% so far this year, outperforming the three most popular cannabis ETFs. The ETFMG Alternative Harvest ETF (MJ) has returned 4.03% on the year, while the AdvisorShares Pure Cannabis ETF (YOLO) and the AdvisorShares Pure US Cannabis ETF (MSOS) have lost 1.19% and 13.21%, respectively. Those three ETFs have more than $2 billion in combined assets.

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