New Marijuana ETF On The Way

April 16, 2019

A year and a half after the first marijuana ETF came to market, investors are finally getting a second option. The actively managed AdvisorShares Pure Cannabis ETF, filed back in January, is set to launch on Thursday.

The fund, which will trade on the NYSE Arca under the memorable ticker "YOLO," will track a portfolio of cannabis companies domiciled in the U.S. and Canada, spanning a range of industries from consumer products to health care.

Another existing AdvisorShares ETF also invests in cannabis-related stocks, the $13.8 million AdvisorShares Vice ETF (ACT), but not as a pure-play.

Troubles Plaguing Marijuana ETFs

Since December 2017, there has been only one pure-play marijuana ETF on the U.S. market: the $1.21 billion ETFMG Alternative Harvest ETF (MJ). (However, Horizons operates several marijuana ETFs in Canada, including the $872 million Horizons Marijuana Life Sciences Index ETF (HMMJ).) has extensively reported on the troubles dogging MJ, from the unorthodox way in which the fund came into existence to its continuing struggles with its fund service providers and persistent trading anomalies.

At the root of all these problems is marijuana's continued prohibition in the U.S. With the substance still illegal at the federal level, few large custodian banks are willing to custody the stocks of marijuana companies for a marijuana-specific fund, as that action could potentially risk their federal license, charter and/or FDIC insurance.

Indeed, the custodial issue came to a head earlier this year for MJ, when the fund suddenly parted ways with its previous custodian, U.S. Bank. ETFMG has since signed Wedbush Securities, a regional broker/dealer, as custodian instead (read: "Marijuana ETF Shifts Custody").

New ETF Addresses Custodial Risk Head-On

However, it appears unlikely that the same problems will dog YOLO, which has contracted the Bank of NY Mellon ("BNY Mellon") as fund custodian, as well as administrator and transfer agent. (BNY Mellon serves these functions for all AdvisorShares ETFs.)

"We've been working with BNY Mellon for more than 10 years,”  said Dan Ahrens, COO and portfolio manager for AdvisorShares. “We have a very honest and open relationship, and there's a great deal of communication and trust between us."

AdvisorShares worked closely with BNY Mellon to prepare a fund that the bank would feel comfortable custodying, says Ahrens.

Furthermore, Ahrens stresses that over 20 authorized participants have agreements in place for the new ETF, which will help smooth creation/redemption activity and provide additional liquidity for trading.

"I can't stress enough the importance of having a regular federal custody bank be in place for this fund," said Ahrens.

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, so-called cannabis companies. These securities could hail from a variety of 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," said Ahrens. One such example is Innovative Industrial Properties (IIRP), a U.S.-listed REIT that focuses on medical marijuana facilities (read: "Proposed Marijuana ETFs Rooted Differently").

However, in the interest of keeping the fund focused on "pure cannabis" plays, says Ahrens, YOLO will not invest in stocks of large alcohol or tobacco companies. That's a significant distinction from 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).

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