Competition Heats Up For Marijuana ETFs

February 08, 2019

On Tuesday, Feb. 5, the ETFMG Alternative Harvest ETF (MJ), the market's sole pure-play marijuana fund, crossed $1 billion in assets under management. The fund's assets now stand at $1.02 billion, making MJ the world's largest marijuana ETF.

It's vindication, perhaps, for an ETF that has seen a rocky 14 months, from the unorthodox way in which it came to launch to the sudden parting of ways with its former custodian. MJ has also suffered persistently high trading spreads and bouts of large premiums/discounts to NAV.

Yet the ETF's asset base just keeps growing, likely due to its rock-star performance over the past several months. Year-to-date, MJ is up 47%, while on a 12-month basis, the fund is up 23%.

 

Source: StockCharts.com. Data as of Feb. 6, 2019.

 

Potential Competitors File

For now, MJ remains the only pure-play marijuana ETF in the U.S. However, in recent weeks, several potential competitors have filed for their own such funds.   

In late November 2018, Innovation Shares filed for a marijuana ETF that would use a broker-dealer instead of a bank to custody its marijuana stocks, thus potentially resolving the custodial reticence that has up to this point prevented many issuers from launching their own funds (read: "New Wrinkle To Marijuana ETFs").

Then on Jan. 28, AdvisorShares filed for the AdvisorShares Pure Cannabis ETF, an actively managed fund that would trade under the proposed ticker “YOLO” and track a wide range of companies directly and indirectly connected to cannabis and hemp cultivation, research, production and sale.   

Just a few days later, on Feb. 5, Amplify ETFs filed for the Amplify Seymour Alternative Plant Economy ETF, a resubmitted version of a previous filing for a fund with a different investment objective. Amplify's fund would cover much of the same ground as the AdvisorShares fund, but it would be actively managed by one of the world's foremost cannabis investing experts.

Thorny Legal Issue

All three fund proposals are careful to point out the legality of the stocks in which they're investing.

Innovation Shares explicitly states it will only invest in "legal cannabis industry" companies, while AdvisorShares requires its holdings to be registered with the Drug Enforcement Agency or other relevant federal agencies.

Amplify's prospectus even goes so far as to say that it won't hold U.S.-based growers or distributors of marijuana or even "medical marijuana" companies, drawing a distinction between these and pharmaceutical companies that derive drugs based on the compounds within the cannabis leaf.

The emphasis on legality is key, as it strikes to the heart of why many big U.S. banks so far have declined to serve as custodians for marijuana ETFs. Custodying stocks involved with a drug still outlawed by the U.S government could potentially run a bank afoul of federal banking laws.

That's true even if marijuana is fully legal in the country in which the stocks are domiciled. Although those stocks may fall outside the jurisdiction of the U.S. Department of Justice, the custodian bank holding them does not. (read: "Promise & Peril Of Marijuana ETFs").

However, in 2018, the marijuana industry hit what many consider a tipping point toward legalization in the U.S., or at least laxer oversight. As of last year's elections, more than 30 U.S. states have legalized the medical usage of marijuana, while 10 have legalized its full recreational usage as well.

Furthermore, Attorney General nominee William Barr has testified that he would respect local and state marijuana laws, stating that he has no intention of using federal resources to "go after" companies complying with state law.

This represents a change in direction for the Department of Justice, which had been renewing its efforts to prosecute federal marijuana crimes under former Attorney General Jeff Sessions. 

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