As we reported earlier this week, YOLO will track an actively managed portfolio of cannabis companies domiciled in the U.S. and Canada, whose industries range from consumer products to real estate to health care (read: "New Marijuana ETF On The Way").
YOLO will have total annual expenses of 0.74%, or a cost of 0.01% less than that of the other pure-play marijuana ETF on the U.S. market, the $1.18 billion ETFMG Alternative Harvest ETF (MJ).
Investing In 'Pure Cannabis'
YOLO will invest 80% or more of its assets into companies that derive 50% or more of their revenue from the marijuana and hemp industry. These securities could originate from a variety of industries and sectors, including agriculture, biotech, pharmaceuticals, real estate, retail and finance.
At least 25% of the fund will be invested in pharmaceutical, biotech and life sciences companies using cannabis and cannabinoid-related substances.
The ETF will also invest in federally legal U.S. companies that don't touch the plant directly, such as Innovative Industrial Properties, a U.S.-listed REIT that focuses on medical marijuana facilities (read: "Proposed Marijuana ETFs Rooted Differently").
However, the fund will not invest in the stocks of large alcohol or tobacco companies, as opposed to MJ, which invests in a range of forward-looking cannabis plays, including Turning Point Brands (TPB), Philip Morris International (PM) and Scotts Miracle-Gro (SMG).
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Inside The Starting Portfolio
In YOLO's starting portfolio are several names familiar to marijuana ETF investors, including Green Organic Dutchman Holdings (8%), Supreme Cannabis (3%), Aurora Cannabis (5%), Tilray (4%) and Canopy Growth (4%). All these names and more appear in MJ.
However, YOLO holds other marijuana stocks that investors have yet to be able to access in an ETF wrapper, including Aleafia Health (3%), WeedMD (2%), Neptune Wellness Solutions (5%), Khiron Life Sciences (2%), Village Farms International (5%) and Innovative Industrial Properties (6%).
All told, about 23% of YOLO's starting portfolio is distinct from MJ.
Active Approach To Cannabis
Though the starting portfolio is 100% equity, the fund's active managers have sweeping discretion to invest in a range of other securities, including derivatives, swaps, futures, other ETFs and even IPO opportunities, according to the fund's prospectus. (The starting portfolio is 100% equity.)
However, YOLO's prospectus places strict limits on what can and can't be defined as a cannabis-related business. For starters, the fund can't invest in companies with operations inside the U.S. unless that company is also legal at a federal level, nor will it invest in companies whose businesses are legal at state or local levels, but not federally.
Furthermore, the fund is currently limited to stocks trading on the NYSE, Nasdaq, Toronto Stock Exchange and TSX Venture exchanges.
New ETF Addresses Custodial Risk Head-On
These restrictions are the result of a year's worth of conversations with the Securities and Exchange Commission and Bank of NY Mellon (BNY Mellon), which serves as YOLO's fund custodian, administrator and transfer agent.
As we covered on Tuesday, AdvisorShares worked closely with BNY Mellon to prepare a list of preapproved securities in which the portfolio managers could invest for YOLO. The company did something similar for the cannabis stocks in the AdvisorShares Vice ETF (ACT).
That list was also provided to the SEC, as well as a full legal opinion (by request) and due diligence on each of the securities in the investable universe from an outside law firm.
"We took a lot of aggressive steps to do our due diligence and get this fund approved legally and properly," Dan Ahrens, COO and portfolio manager of AdvisorShares, told ETF.com.
Contact Lara Crigger at [email protected]