Launching an ETF isn't easy, even for vanilla, large cap core products. There's regulatory paperwork, back-and-forth with the SEC, listings requirements—not to mention lining up market makers and initial seed capital.
For funds offering exposure to cannabis stocks—a market that's still technically illegal at the federal level—issuers must fight even harder to get their products launched. Launch delays have become common for marijuana ETFs, caused by everything from intensifying SEC scrutiny to persistent reluctance among the capital markets community.
These issues could spell problems for nascent marijuana ETFs long past launch, even though the regulatory climate is becoming more favorable.
More Marijuana ETFs On The Way
These six ETFs are listed below:
|Marijuana ETFs, Launched & Prospective|
|MJ||ETFMG Alternative Harvest ETF||ETFMG||12/26/2017|
|YOLO||AdvisorShares Pure Cannabis ETF||AdvisorShares||4/17/2019|
|THCX||The Cannabis ETF||Innovation Shares||7/9/2019|
|CNBS||Amplify Seymour Cannabis ETF||Amplify||7/23/2019|
|TOKE||Cambria Cannabis ETF||Cambria||7/25/2019|
|N/A||Global X Marijuana ETF||Global X||Future|
Sources: ETF.com, issuers; data as of July 22, 2019
For issuers, the good news is that the custodial risk that has plagued cannabis ETFs for years appears to finally be lifting.
Until very recently, many large national banks were unwilling to hold cannabis stocks specifically for a cannabis ETF, out of fear that doing so could run them afoul of federal banking law.
In fact, the ETFMG Alternative Harvest ETF (MJ) and its former custodian, U.S. Bank, parted ways over just this issue; MJ's issuer has since signed Wedbush Securities, a regional broker-dealer, as its custodian instead (read: "Marijuana ETF Shifts Custody").
Political Tides Shift
Politically, however, the tide appears to be shifting toward greater legalization. Two-thirds of states have adopted some measure of marijuana legalization within their borders, while 11 states have legalized it for full adult recreational use.
Even Congress has begun debating how—not if—to move forward on legalizing marijuana at the federal level (read: "Congress Rethinking Marijuana; ETFs May Benefit").
As a result, banks that were once reticent to custody marijuana stocks have changed their tune. For example, the Bank of New York Mellon serves as custodian for the AdvisorShares Pure Cannabis ETF (YOLO), while Brown Brothers Harriman will custody the Cambria Cannabis ETF (TOKE).
Difficulties In Securing Seed Capital
However, even as custodian banks become more welcoming to marijuana products, other ETF servicers have begun to express reservations.
On July 5, the Amplify Seymour Cannabis ETF (CNBS) went effective, meaning the fund vehicle itself was ready to be populated with stocks and accept investment assets. However, the fund didn't officially begin trading until today, July 23.
The delay resulted from difficulties in lining up seed capital, says Amplify's CEO Christian Magoon: "We talked to more parties than normal about obtaining seed."
Many potential seed partners had "reputation concerns," he added. Often, broker-dealers place restrictions on the types of stocks that advisors can own for their clients, including marijuana stocks.
Magoon says that means that "a lot of the market-making community was concerned that if they were seeding or acting as lead market maker for a cannabis ETF, that it might potentially cause them some business relationship problems with the brokerage community."