The cannabis investment we have been waiting for is here: AdvisorShares Pure US Cannabis ETF (MSOS).
MSOS is the first and only actively managed US-listed ETF dedicated solely to US cannabis.
The first response some readers will have to this is, “An ETF? What is this guy smoking?” I understand that in the cannabis world, ETFs are not thought of as “sexy.” I made the case for them in my very first SA cannabis article in 2019: Cannabis Investing: Maximize Your Chance For Success. Some readers lamented the lack of a US-only ETF that could avoid the dumpster-fire-in-a-train-wreck that has been Canada so far. Other readers were more skeptical. More readers said they preferred the strategy of buying a basket of cannabis stocks, which could be considered a DIY ETF on a smaller scale. There is certainly a case to be made for that – you can decide for yourself what companies are most promising and easily move among them – but I suspect that many skeptics also harbor the dream of picking the Amazon or Netflix or Tesla of cannabis seeing their investment increase many times over. I’m guessing that this is a dream unfulfilled so far.
The performance of sector ETFs has been nothing to brag about either. The ETFMG Alternative Harvest ETF (MJ) is the largest and oldest, and the chart below shows that it declined 43% over the past year. This is roughly the same as a basket of five cannabis stocks that declined 18% to 79%. One-year performance of other ETFs was: HMLSF -49%, TOKE -39%, YOLO -23%. The cannabis investment climate will be changing, though, and MSOS is a particularly good place to be when that happens.
- Inception date: September 1, 2020
- Portfolio manager: Dan Ahrens
- Management fees: .74%
- Historical NAV range: $20.77-$25.00
- Share price (10/8/20): $22.87
- Assets: $13,500,000
- Avg. daily volume: 47,000
Top 10 holdings (10/4/20):
|Ticker||Security Description||Shares||Price||Market Value||Weight %|
|OTCQX:GTBIF||GREEN THUMB INDUSTRIES SWAP||88,000||12.97||1,141,360||9.13%|
|OTCPK:CURLF||CURALEAF HOLDINGS INC SWAP||159,800||7.13||1,139,374||9.11%|
|OTCQX:TCNNF||TRULIEVE CANNABIS SWAP REC||60,200||18.57||1,117,914||8.94%|
|IIPR||INNOVATIVE INDUSTRIAL PROPER||8,167||125.31||1,023,407||8.18%|
|OTCQX:CRLBF||CRESCO LABS INC SWAP REC||170,800||5.99||1,023,092||8.18%|
|OTCQX:TRSSF||TERRASCEND CORP SWAP REC||128,200||4.40||564,080||4.51%|
|ARNA||ARENA PHARMACEUTICALS INC||7,128||74.98||534,457||4.27%|
|OTCQX:AYRSF||AYR STRATEGIES INC SWAP REC||41,600||12.70||528,320||4.22%|
Source: MSOS | AdvisorShares
Source: MSOS | AdvisorShares
Stock price since inception (9/1/2020)
Notes on the basics:
- Dan Ahrens is a cannabis-experienced portfolio manager. He also manages the AdvisorShares Pure Cannabis ETF (YOLO) and the venerable AdvisorShares Vice ETF (ACT) which covers alcohol, tobacco, and cannabis.
- The .74% management fee is reasonable, at only $7.40 on a $1,000 investment.
- The top 10 holdings illustrate the advantage of being a new cannabis ETF. It is heavily weighted to companies that have demonstrated success. Other holdings have been acquired at low post-crash values.
Why MSOS is the investment for cannabis now
The US is the dominant market today, with over 70% of the global market. It is also arguably the market with the most potential. Estimates of US growth vary, but the one thing they have in common is that growth will be huge. Prohibition Partners predicts the $10 billion US 2019 sales will grow to $37.9 billion in 2024. In the US, medical cannabis is now legal in 33 states and recreational cannabis in 10, with more on the cusp as cash-strapped states see the huge tax revenue potential. In contrast, recreational cannabis was not legal in a single European country at the time of the 2019 Prohibition Partners report.
The cannabis market is now positioned for growth in sales and profit. The last two years have seen tremendous capital destruction after the giddy euphoria of Canadian legalization. The investment community and cannabis companies have learned a great deal about what works, and money is much less likely to flow into schemes that have a low probability of success. The companies you see in MSOS top ten holdings are those that are succeeding or have a reasonable probability of success, something that simply was not possible two years ago.
Although there is much more clarity in the sector than even a year ago, the number of companies competing for investment money is large. As a rough proxy for the entire sector, MSOS takes away some of the uncertainty. If the sector grows sales 379% by 2024, we can assume that the sales of MSOS underlying companies will grow by a similar amount. Some (as yet unknown) companies will grow more, but most investors would be quite pleased to have money in a vehicle with that kind of growth.
The long-term growth projections for US cannabis have stayed remarkably robust in the face of turmoil from vaping health issues, delays in federal regulation, general economic uncertainty, COVID-19, and struggles of high profile cannabis companies. Analysts expect growth rates of 30% a year and a market roughly four times its current size by the middle of the decade. There are risks, however, some that are characteristic of an emerging industry and some peculiar to cannabis.
Regardless of fundamentals, cannabis stock and ETF prices have historically moved in the same direction as the broader market. If the market drops, as many analysts expect, MSOS will likely do the same. In addition, cannabis stocks have a high beta, meaning that their prices rise and fall with greater magnitude than the general market. A general market decline would result in a greater decline for MSOS (although MSOS would decline less than many individual issues).
Regulation is potentially a major risk for industry growth. As one example, regulatory delays at the FDA this year were a major setback for CBD-centric companies. The hoped-for mass distribution of CBD by FDM (food, drug, mass-merchandising) companies has been delayed, as the FDMs will not sell products without FDA approval. The direction of FDA cannabis regulation is forward, but its speed is one of the biggest unknowns.
State legislatures and Congress can also be a source of risk. State legislation creating and expanding legal cannabis is critical to industry growth, and it has come to a halt this year as legislatures are preoccupied with COVID-19 and social unrest. Likewise, federal legislation has been proposed that will advance the industry’s position in banking, stock listings and other areas, but it has been postponed for similar reasons.
As an ETF, MSOS risks mirror those of the industry as a whole. The risks seem more likely to delay progress rather than do permanent damage. Societal momentum towards greater acceptance and government’s responsibility to reflect the desires of citizens point to a positive long-term outcome. The success of cannabis and MSOS will not be denied, but setbacks of varying severity will occur. Investors need to look at MSOS and the entire industry with a multi-year timeline.
Today is the best time to invest in cannabis in history. Sales are growing dramatically and have shown remarkable resilience even during the pandemic. The growth runway extends out for many years. Much of the excess of the market’s early days has been washed out. Companies and investors are maturing as they learn what’s necessary to succeed and prosper. MSOS provides a way to participate fully in the largest and most dynamic market – the US. As a new market riding change in society cannabis is attractive to independent, risk-taking investors. Every investor owes it to himself to weigh risk vs. reward. MSOS is positioned for substantial gains with below average risk and can be part of the portfolio of everyone interested in the sector’s future.
TRADING NOTE: Because of its age and/or size, MSOS may not yet be available on some trading platforms. It is not available on TIAA-CREF but is on Fidelity.
Disclosure: I am/we are long MSOS, YOLO, MJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.