Proposed Marijuana ETFs Rooted Differently

February 26, 2019

Amplify Enlists Expert Portfolio Manager

Amplify's proposed ETF would also be actively managed. However, rather than relying on in-house expertise, Amplify lists Tim Seymour, CNBC host and marijuana investing expert, as the fund's portfolio manager.

Seymour will base portfolio decisions on public regulatory filings, third-party research and other public data, as well as his own evaluations of the companies' financial fundamentals, taking into consideration everything from macroeconomic trends to environmental, social and governance scores.

Of the three filings, Amplify's proposal delineates the clearest rules about what kinds of global companies the funds can and cannot invest in, breaking eligible constituents into three categories:

  • Cannabis/Hemp Plant (including pharmaceutical and biotechnology firms, cultivation and retail, and firms involved in hemp and cannabis-infused products)
  • Support firms (including agricultural technology, real estate and commercial services)
  • Ancillary companies (including consumption devices, investing and finance, technology, media and other companies)

Amplify's approach also implements several liquidity screens, including a minimum market cap of $75 million for U.S. stocks and $100 million for foreign stocks, and a three-month average daily trading volume of at least 1 million shares.

Some Similarities To MJ

Like MJ, the Amplify proposal wouldn't be pure-play, precisely; rather it would take a holistic, cross-disciplinary approach toward the cannabis industry.

However, it would forgo exposure to tobacco companies, at least at first.

Amplify's prospectus also takes great pains to point out that the companies it invests in will be legal—in fact, using the same language in spots as MJ's prospectus, language which so far has passed muster with the Securities and Exchange Commission.

Index-Based Approach

Of the three filings, only the Innovation Shares proposal would be index-based, but that doesn't necessarily mean it would be a vanilla product.

Details about the index are slim, and Innovation Shares declined to comment for the article, citing the "quiet period" before launch. However, the prospectus lists the Innovation Labs Cannabis Index as its benchmark.

No information about the index has yet been published, but it is likely that the index will resemble the other Innovation Labs benchmarks that underpin the $10 million Innovation Shares NextGen Protocol ETF (KOIN) and the $1 million Innovation Shares NextGen Vehicles & Technology ETF (EKAR).

Those indexes use an AI-driven selection process to evaluate potential constituents, implementing a proprietary natural language processing algorithm that scours public documents and online databases for information to sort and rank companies.

More Limited In Scope

The Innovation Shares proposal would have a smaller global footprint than the other proposed and existing funds, limiting itself to only U.S. and Canadian companies that "have a business interest" in the legal cannabis, hemp or cannabidiol pharmaceutical and consumer wellness and product markets. (The vast majority of legal cannabis companies are domiciled in Canada.)

Like the Amplify proposal, the Innovation Shares fund would implement size and liquidity screens, including a minimum market cap of $100 million and at least 200,000 shares traded during the month of the index reconstitution.

Though the index is market-cap-weighted, individual securities are capped at a 7% weighting, with the excess proportionally redistributed among the remaining constituents.

The index would be reconstituted monthly, on the third Friday of each month.

Contact Lara Crigger at [email protected]

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