Marijuana Legislation Could Buoy Associated ETFs

In November, seven states will hold votes on ballot initiatives to legalize marijuana. Should they pass, the beleaguered cannabis industry, which has exhibited dramatically bad performance for at least the past 12 months, could get a needed boost from expansion into those states—Arkansas, Maryland, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.  

This may help marijuana-focused ETFs. Nine ETFs offer unleveraged exposure to the space, and all of them have seen steep declines during the past 12 months of as much as 80%. Currently, only two U.S.-listed ETFs with more than $100 million in assets under management cover the space. While their investing styles differ, their performance is similarly dismal. 

The $391.6 million ETFMG Alternative Harvest ETF (MJ) has been around since 2015, but it has only offered exposure to cannabis stocks since the end of 2017, when it switched its index from covering Latin America real estate equities to global marijuana equities.  

Its total assets have fluctuated, at times surpassing $1 billion since its coverage switch. Meanwhile, the actively managed AdvisorShares Pure US Cannabis ETF (MSOS), which launched in September 2020, has $682.2 million. MSOS only overtook MJ as the largest U.S.-listed cannabis ETF around the start of the year. 

MJ is global in nature and primarily invests in equities, though its largest holding at nearly 17% of its portfolio is the ETFMG U.S. Alternative Harvest ETF (MJUS), a U.S.-focused fund that can hold multistate operators and special purpose acquisition companies (multistate operators can own marijuana operations in multiple states where they grow, process and distribute marijuana within a single state where marijuana is legal, which allows them to avoid running afoul of federal laws).  

MSOS similarly can invest in such firms, and mainly uses swaps to achieve that exposure—swaps sometimes are the best way to gain access to such firms. 

A Peek Inside 

MJ has 43 holdings, with a weighting to the U.S. of nearly 56% of its portfolio. MSOS is focused almost exclusively on the U.S., as its name implies, with a roughly 86%/14% split between the U.S. and Canada in its portfolio. It has just 15 holdings; 10 are equity holdings that represent less than 8% of the portfolio. The rest is invested mainly in derivatives (roughly 38% of the portfolio) and in cashlike fixed income exposure (nearly 54% of the portfolio) that serves as collateral for the derivatives.  

MSOS is down nearly 48% for the year-to-date period as of Aug. 25, while MJ is down almost 42%. The performance differential narrows when you consider the funds over the 12-month periods, with MSOS down 60% and MJ down 61%.  

The U.S. and Canada are the largest markets for legal cannabis, according to Statista, which more specifically notes that California is the largest single cannabis market in the world. That suggests MSOS is best-positioned to benefit from equity upside resulting from any legalization that occurs in November, as it is already primarily covering U.S. securities. MJ, which has a combined weight of roughly 82% in Canada and the U.S., offers more diluted exposure to those two countries, as its focus is global.  

MSOS is also slightly cheaper, at 0.73% versus 0.75% for MJ, and has slightly better liquidity and trading stats.  

Contact Heather Bell at [email protected]