Just about anyone in the cannabis industry will tell you how hard it is. Legalization issues, banking constraints, and a preponderance of OTC stocks make it even harder to be a cannabis ETF (exchange traded fund). Recently the sponsor of the Cannabis Growth ETF (BUDX), Foothill Capital Management, chose to close the fund, roughly six months after it converted it from a mutual fund into an ETF with $3.9 million in assets under management. April 25 was expected to be its last day of trading.
BUDX shuts down
There is so much interest in trading cannabis stocks that an ETF seems like an easy sell. When BUDX launched as a marijuana ETF, it was entering a very crowded market, with several existing ETFs tracking cannabis representing billions of dollars in assets. The largest is currently the $1 billion AdvisorShares Pure US Cannabis ETF (MSOS), which launched in 2020 and usurped the original ETFMG Alternative Harvest ETF (MJ) as the largest U.S.-listed marijuana ETF. MSOS has pulled in nearly $760 million over the last 12 months, while MJ lost more than $145 million.
The backdrop to the cannabis sector along with many others is the overall bear market. Prices for marijuana stocks overall have plunged. For the past year, the Horizons US Marijuana Index ETF and the US Marijuana Companies Index ETF are both down 64%. The Horizons Marijuana Life Sciences ETF has dropped 61% for the past year and the North American Marijuana Index has fallen by 64%. It’s pretty hard to convince new money to invest in an ETF that has experienced a huge valuation loss.
Matt Hawkins, founder and managing principal of Entourage Effect Capital said, “Investors in any sector are generally more skittish in a bear market. This is especially true for retail investors, a group that the public cannabis industry heavily relies upon. As primarily private-side investors in the cannabis industry, we feel that the depressed valuations create a tremendous investment climate for this emerging market.”
Back in September 2021, Foothill Managing Director Max Banhazl told ETF. com that the mutual fund had trouble getting shelf space on securities broker platforms, and it may have run into the same problem after it adopted the ETF wrapper. Hawkins added, “It is definitely challenging to have so many stocks on the OTC instead of the NASDAQ and NYSE, and this is something we expect to continue for the foreseeable future. When differentiating cannabis ETFs, it is our opinion that the larger multi-state operators (MSO’s) and sizable single-state operators (SSO’s) in the larger state markets have an advantage over other public companies on the plant-touching side.”
Cannabis ETNs close
BUDX is the first ETF converted from a mutual fund into an ETF to close, but it wasn’t the only cannabis product to shut down. At the end of December, the Bank of Montreal closed out two of its cannabis Exchange Traded Note products. Both the MicroSectors Cannabis ETN that used the symbol MJJ and the MicroSectors Cannabis 2X Leveraged ETN using the symbol MJO.
In general, it hasn’t been great for ETFs overall. The total number of announced and completed closures of all types of ETF’s for the year comes to 33. A total of 16 ETFs have closed so far this year compared with 19 last year. However, the planned closures of BUDX, eight funds issued by ProShares and five funds issued by Transamerica that are set to be complete by early May boost the total well ahead of last year’s comparable number for the same period
New cannabis ETFs
While some are finding the space, difficult, others are continuing to jump in. Roundhill Investments launched the Roundhill Cannabis ETF (WEED) on April 20. The fund invests in various cannabis-related companies and says it may utilize total return swaps to provide exposure to U.S.-focused cannabis companies. The Advisor is waiving 0.16% of its management fee for the Fund until at least April 30, 2023. The NAV though has plunged from its initial price of $15.32 to lately closing at $11.68. It currently has $1.8 million in assets under management. Its gross expense ratio is 0.75% and it is listed on the Cboe Exchange.
In November, AdvisorShares rolled out its third ETF to focus on marijuana. The AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) joins the AdvisorShares Pure US Cannabis ETF (MSOS)—the largest marijuana ETF trading in the U.S. with $1.24 billion in assets under management—and the $258 million AdvisorShares Pure Cannabis ETF (YOLO). PSDN comes with an expense ratio of 0.92% and lists on the NYSE Arca.
The fund, like all AdvisorShares offerings, is actively managed, with Poseidon Investment Management listed as its subadvisor. Poseidon has been involved in managing cannabis assets since 2013 via hedge funds. What sets PSDN apart, in particular, is its ability to implement leverage on select securities in its portfolio. The ETF, according to its prospectus, can apply up to 1.5x leverage to individual securities in the fund.
Tyler Grief, Portfolio Manager at Poseidon Asset Management seems to think that smart money sees a bear market as a buy signal.
“Whenever a sector is underperforming, like cannabis, it is more difficult to attract investors. However, those investors which do have the foresight to invest in the tougher times generally outperform over the longer term. We have experienced increasing interest from investors, especially institutional, as the sector has taken a beating. Many of them see opportunity and are waiting for the right time to pull the trigger.”
Poseidon though faces the same structural stock issues as the other ETF’s. Grief added, “The main disadvantage is that institutional investors are less likely to invest in OTC stocks. This lack of institutional investment impacts liquidity and influences valuations. We are optimistic that up-listing to NYSE and NASDAQ of U.S. cannabis stocks will happen in the future. Canadian cannabis companies are allowed to list on the NYSE and NASDAQ, yet US cannabis companies are not. This should obviously change and it is up to Congress to do so.”