What's Really in Your Cannabis ETF? A Deeper Look at the Diverging Investment Strategies in the Cannabis ETF Market
By Victor Schramm, CFS®
As a Portland, Oregon-based firm, I get asked a lot about Cannabis Industry investments. After all, we’ve been at or near the epicenter of the so-called Green Rush for years. Every once in a while I get asked for my “favorite marijuana stock.” We’re going to swerve away from that altogether in this article.
For the most part, as an advisor with expertise in Mutual Funds and ETF’s, I get asked about ETF’s operating in this space. What interests me most is not necessarily which ETF is “the best” overall- it’s which strategy is being used by each of these ETF’s. What’s clear to me as a portfolio manager is that not all strategies are suited to all portfolios, so this article will focus on identifying the approaches being used by the major ETF’s.
What Is a Cannabis Investment?
In America, cannabis is still in a regulatory limbo as a product. On the one hand, in many areas, one can buy CBD at grocery stores and gas stations. Sometimes, it’s legal to do so, though not always. On the other hand, it’s still Federally illegal to sell. 1
What that means for Wall St. is that the risk of having public Securities whose core business is producing cannabis products is through the roof- and often outright illegal to date. For investors wanting to directly purchase a share of the highest profiting recreational marijuana farms and retailers, they’ll have to look beyond the stock market. For now.
What that leaves us with is a small suite of cannabis-related ETF’s buying companies that do one or more of the following:
- Grow, distribute or sell marijuana (not in the U.S.)
- Research the medical uses of marijuana, such as those in the pharmaceutical and biotech industries.
- Have significant exposure to marijuana stocks, such as those in the alcohol and tobacco industries.
The 4 ETF’s we’re looking at in this space all have some mix of these strategic exposures to the cannabis industry.
The 4 LargestCannabis ETF's
MJ Top 5 Portfolio Holdings
YOLO Top 5 Portfolio Holdings
ACT Top 5 Portfolio Holdings
THCX Top 5 Portfolio Holdings
MJ Country Portfolio Allocation
YOLO Country Portfolio Allocation
ACT Country Portfolio Allocation
THCX Country Portfolio Allocation
MJ Market Cap Weightings
YOLO Market Cap Weightings
ACT Market Cap Weightings
THCX Market Cap Weightings
Analysis
Without getting into the reeds of which particular cannabis business model is optimal for investors at the moment, a very clear picture of what these ETF’s are really doing with your funds is clear from a look at the regional breakdown and the Market Cap weightings of these funds. For the most part, investing in this space entails buying micro cap stocks that are largely from Canada, the United Kingdom, and some secondary and indirect exposure in United States companies.
In essence, investors in these ETF’s are mostly investing in Global, Small & Micro Cap Companies, some of which are directly involved in the cannabis industry. All of the portfolios are very concentrated by comparison to how most ETF investors typically invest: there is not one ETF that has more than 40 positions. Expense Ratios all cluster in the range 0.7% to 0.75%- none of them have really distinguished themselves as the low cost option.
In my opinion, investors need to be very cautious when investing in ETF’s with less than $75 million in Assets. At that point, we’re talking about funds that may have little to no liquidity on the market. Best trade practices need to be in place when transacting these Securities- using limit orders, checking for daily trade volume, etc.
The one fund that really sticks out to me as unique in this field is AdvisorShares Vice ETF (ACT). This is the only fund with major Large Cap exposure and a mostly U.S.-based portfolio. Many of the stocks in this portfolio are stocks I have a positive sentiment on and have recommended in various portfolios over the years. With that said, I see this portfolio as the one with the greatest portfolio overlap with other holdings investors are likely to have. For example, if you’re invested in Europe at all, you probably have Diageo and Novartis in your portfolio already. If you own U.S. Large Cap stocks, there’s a near certainty you own Abbot Labs or AbbVie- or both. The problem I see here is one of inefficiency for investors. After all, why pay 0.7% to own Abbot Labs in a “cannabis oriented” ETF when you could pay 0.03% to own it in Vanguard’s Total Stock Market ETF?
One of the strangest allocations among these funds is not actually to a cannabis stock at all. If you look back at YOLO’s top holding, it’s a 13% allocation to cash. None of the other ETF’s in this space have this cash management problem. If investments in the field can’t be found to the point that this much cash is being left on their balance sheet, perhaps investors’ assets are better off in another fund. Indeed, the fund is hardly over diversified- it owns only 26 positions to date!
Investors wondering where to fit a cannabis ETF in a portfolio could easily be guided by market cap and region. Depending on which style of portfolio looks appealing, if one of the Micro Cap heavy funds like THCX for example, it could be slated among the Micro Cap allocation in a portfolio. If you’re looking to stay mostly in the U.S. and in Larger, less volatile companies, perhaps AdvisorShares Vice ETF could fit in with Large/Mid Cap US stocks.
Conclusion
I’m an advisor who believes investors always need to understand what they’re buying. Nonetheless, it’s especially important in these niche sectors to understand what ETF’s are actually doing with your money. If you bought the Vice ETF from AdvisorShares thinking you’d get a wild, small-company focused, go-go fund chock-full of marijuana stocks, you’d be sorely mistaken. Additionally, if you’re in one of the States with active, State-legal cannabis industries and want to join in the local Green Rush, none of the major ETF offerings will deliver that.
For now, those seeking to participate in America’s cannabis industries directly will have to either wait until the regulatory framework changes significantly or find local opportunities to invest with private entrepreneurs (when and where it’s legal to do so, obviously). I have a feeling that should those regulatory changes come and the cuffs come off of Wall st.’s ability to bring cannabis stocks to the Market, we’ll have a great deal more to talk about. Can any of the current ETF offerings stand up to that competition?
All data and information used from publicly available information on funds and corporations via ETF Data Base, filings from the funds themselves, and Morningstar.
The author of this article, Victor Schramm, CFS®, does not own any of the 4 ETF’s discussed in this article and does not intend to own any of them.
Meet the Author & Portfolio Manager
Victor Schramm is a Certified Fund Specialist (CFS®), with expertise in Mutual Funds & Variable Annuity Separate Accounts. He focuses on long term investing geared toward our annuity clients as a Fee Only Investment Advisor. He lives in Portland, OR.
Victor Schramm, CFS®Analyst & Portfolio Manager
Disclaimer:
This information is solely a representation of publicly available facts intended for educational use only. This is not a solicitation to buy or sell any public or private Security, in any city named in the article or elsewhere. Neither is it a recommendation to invest in any named fund or business. Exchange Traded Fund (ETF) composition and weighting is not a market timing tool for buying or selling any security, and should not be used as the sole criterion of investment selections. Investors need to do due diligence on the legality of cannabis related investments. Cannabis industry investments are volatile and caution needs to be used in investing in this sector.