The marijuana business is correctly described as a fledgling industry. But what investors see as a potential promised land may be further away than many expect, because full federal legalization can take a long time. The increasing legalization of marijuana in the United States makes this a complicated and potentially lucrative space for investors. Most marijuana ETFs are passively managed, which means they track indices.
Marijuana has been legalized for recreational use in 15 US states and Washington, DC. However, it is still illegal at the federal level. This has led to a strange scenario. Canadian licensed producers (known as LPs) do not sell cannabis products in the US because it is against US law. But the shares of the five largest are listed on the Nasdaq or New York Stock Exchange: Don’t Miss: To Benefit From The Planned Merger Of Tilray And Aphria, Buy Aphria, Says This Analyst Meanwhile, The Four Largest US Companies who sell marijuana products in states (and Washington DC) where recreational use is legal are not listed on US exchanges because they are engaged in activities that are technically illegal at the federal level. They are listed without a prescription. These companies are known as Multi-State Operators (MSOs): In an August 2013 memo to US prosecutors, now known as the “Cole Memo,” James Cole, the deputy attorney general at the time, defined the position of the Department of Justice as a dependent of the states that had legalized marijuana for recreational use to establish regulatory schemes to ensure compliance with eight objectives of the Department of Justice listed on the first and second pages of the document. Since then, the federal government has not attempted to arrest individuals within those states for purchasing small amounts of marijuana for recreational use. But under the Mutual Funds Act of 1940, mutual funds and publicly traded funds still cannot own shares in MSOs. AdvisorShares has been able to fix this problem by purchasing MSO stock total return swaps on AdvisorShares Pure Cannabis ETF YOLO, -4.00% and AdvisorShares Pure US Cannabis ETF MSOS, -3.42%. The Securities and Exchange Commission required AdvisorShares to obtain an outside legal opinion on the total return exchanges, which you can read on the AdvisorShares website. You should also read the prospectuses for YOLO and MSOS if you are considering investing in them to learn more about their investment methodologies and risks, just as you should read the prospectus for any other mutual fund or ETF you consider. Dan Ahrens, the YOLO and MSOS portfolio manager, said during an interview on February 12 that he does not expect Canadian LPs to be able to sell marijuana in the US for the “foreseeable future” because “neither Congress controlled by Democrats and President Biden never called for full federal legalization of marijuana. ” This is where the discussions begin. It’s easy for a politician to say that he wants recreational marijuana “decriminalized” in small amounts. But that’s not full legalization, which in addition to allowing recreational use of marijuana anywhere in the US, would allow banks to provide full services to US marijuana producers and distributors and allow their shares are traded on public exchanges. Full legalization would presumably also open up the US market to Canadian LPs. So Ahrens hopes state-by-state legalization will continue, with MSOs being the biggest beneficiaries. He thinks Canadian LPs are worth investing in as well, which is why YOLO owns shares in them. Canopy Growth Corp. is 38.6% owned by Constellation Brands Inc.STZ, -1.00%, the brewer of Corona and Modelo beers, which has many other well-known consumer brands and has guarantees that allow it to take a stake majority in Canopy. This gives Canopy deep pockets: the company has an agreement with Acreage Holdings Inc. ACRHF, -2.71%, another US MSO, through which Canopy would acquire Acreage Holdings in case of “changes in the federal law of US To allow the general cultivation, distribution and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States. ” That language comes from page 9 of Canopy’s 10k report for the fiscal year ending March 31, 2020 MSOs already have a bigger business Here’s a comparison of sales data from the last four quarters for all five LP and four MSO. Company fiscal quarters are not uniform, so the date-to-date for the most recent reported quarter data that was available in FactSet on February 18 is in the right column. The most recent quarter is marked Q0, the previous quarter is Q-1, and so on. All data in all tables are in millions of US dollars. Canadian LPs first – scroll the table to see all the data. During four quarters, the five LPs had combined sales of $ 1,284 billion, up 24% from the prior four-quarter period. If we divide the combined market capitalization of $ 33.785 billion by sales for the last four quarters, the final price-to-sales ratio for the group is 26.3. And now the US MSOs: Again, you’ll need to scroll through the table to see all the data. For four quarters, the five MSOs had combined sales of $ 1.715 billion, an increase of 163% over the prior four-quarter period. If we divide the combined market capitalization of $ 21.862 million by the sales of the last four quarters, the final price-to-sales ratio for the MSO group is 12.7 Therefore, the MSOs are increasing their sales much more quickly and have a valuation much lower sales. . Don’t miss out: I’m looking for a red-trending state that’s cannabis-friendly and has no state income taxes. Where should I retire with $ 60,000 a year? Perhaps the difference in valuation should not be a surprise. MSOs are only traded without a prescription. Therefore, individual investors should do their best to invest in them, or go for YOLO or MSOS ETFs. Here’s another set of data, this time comparing net cash from operating activities for the two groups. First, the Canadian LPs: Even though Tilray reported its fourth quarter results on February 17, the above cash flow information for the company is only as of September 30. This is because the February 17 report did not include a cash flow statement. LPs as a group had negative cash flow from operations for all periods, according to FactSet data. And now the US MSOs: The MSOs as a group had positive cash flow from operations for three of the four quarters and for the four quarters combined. A counterargument YOLO and MSOS are actively managed. The only other actively managed cannabis ETF is Amplify Seymour Cannabis’ CNBS ETF, -4.63%. You can read more about CNBS here. During an interview on February 17, Tim Seymour, the CNBS portfolio manager, said that AdvisorShares has done “a good job building a business where they have the ability to invest in companies that I would like to have.” It also said Amplify had taken a “more conservative approach” when it established CNBS in July 2019 because the SEC had not issued a broad decision on allowing mutual funds or ETFs to invest in MSO total return exchanges. In addition to managing CNBS, Seymour is on the investment committee of JW Asset Management, a $ 2 billion hedge fund focused on the cannabis industry. “I’m investing in companies that I think are representative of the best investor exposure to get the best returns at the moment,” Seymour said. He also highlighted the importance of active management in space. He agrees with Ahrens on the importance of the US market, especially if Congress fully legalizes marijuana and allows financial services companies to treat the industry as they would any other legal industry. Canopy Growth Corp. is CNBS’s largest holding company, and Seymour pointed to the Acreage Holdings deal as an example of how a very well-funded Canadian LP can instantly transform into a major US player with full legalization. During an interview on February 16, Christian Magoon, CEO of Amplify ETF, said that CNBS was the best performing US ETF during 2021 through February 15, excluding inverse and leveraged ETFs. He also said the firm was “actively exploring the possibility that CNBS could invest in derivative securities.” Therefore, it is possible that at some point CNBS will also make indirect investments in the MSOs. Returns of Actively Managed Cannabis ETFs Here is a comparison of the total returns of the three actively managed ETFs, as well as the MJ ETF from ETFMG Alternative Harvest – 5.10%, which is passively managed and is the oldest cannabis ETF.
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They have all made dramatic upward movements this year, but you can see that CNBS has doubled, followed by MJ and the two AdvisorShares ETFs. The AdvisorShares Pure US Cannabis ETF (MSOS) was established in September 2020. Therefore, the following chart compares the total returns of the other three ETFs during 2020:
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So last year, YOLO, which has both MSO and LP, was the best performer, while MJ’s passive approach underperformed. YOLO and CNBS made significant returns, despite the five LPs being mixed, with brutal drops for Tilray and Aurora Cannabis stocks:
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