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. 

Good Time To File?

The political environment may be good for marijuana ETFs in more ways than one, given the recent government shutdown (and the potential one looming on the horizon).

All three of the proposed marijuana ETFs would be launched from existing trusts—a technical point of procedure that may impact their likelihood of coming to launch.

When an existing ETF issuer, one that has already secured exemptive relief and the approval to establish a trust from the SEC, wants to launch new funds, it usually does so by filing for a "post-effective amendment" to the trust. Barring SEC comment, the funds proposed in these post-effective amendments often become automatically effective after some waiting period, usually 60 or 75 days.

However, given that the government shutdown has generated a tremendous backlog for the agency, it is unclear how likely if or when that SEC comment would come—not just for marijuana ETFs, but for all proposed funds (read: "SEC Shutdown's Impact On ETFs").

That's not to suggest issuers are attempting to skirt SEC scrutiny; after all, both AdvisorShares and Amplify could have filed their funds during the shutdown, but chose not to. (Innovation Shares filed before the shutdown began.)

However, with the SEC so overtasked, and with less pressure from a Justice Department eager to persecute marijuana-related crimes, this may in fact be the perfect moment to bring these more controversial funds to launch. Only time will tell.

Similarities Among Filings

Both the AdvisorShares and Amplify proposals would be actively managed, while the Innovation Shares proposal would be indexed. None of the three proposals has yet specified an expense ratio.

What's more, none of the three ETFs have yet named a custodian, transfer agent, accounting agent or fund administrator. Whether or not the firms would use the same service providers listed for other funds within the same trust is unclear.

The Innovation Shares fund would track U.S. and Canadian companies involved in the cannabis, hemp and cannabidiol industries, including pharmaceutical firms, consumer wellness and product markets.

Meanwhile, the AdvisorShares fund would invest in companies that derive at least half their net revenue from the marijuana and hemp industries, or firms registered with the DEA to conduct cannabis-related medical product research and development. Intriguingly, AdvisorShares also reserves the right to invest in initial public offerings, in addition to the usual menu of equities and derivatives.

Finally, the Amplify fund would track companies engaged in three different sectors of the global cannabis/hemp ecosystem: industries based on the cultivation, sale and production of the cannabis/hemp plant; supporting industries such as agricultural technology or real estate; and ancillary industries such as consumption devices.

The fund would be managed by Tim Seymour, head of Seymour Asset Management and host of CNBC’s Fast Money.

Contact Lara Crigger at [email protected]

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