What Is The Best Way To Bet On The Cannabis Industry?

2021年7月15日

-- With Senate Majority Leader Chuck Schumer proposing legislation on Wednesday to federally legalize Cannabis, it's important to analyze what ETF options investors have to invest in the budding sector.

-- There are many different ETFs, each with different liquidity profiles, investment strategies, and geographical focuses.

-- MSOS and YOLO are the best positioned to take advantage of the shifting legislative landscape.



With the potential federal legalization of cannabis around the corner, I figured now might be a good time to take a look at what options exist for those looking to invest in the sector, by comparing all of the available ETFs that are currently on offer and getting a better understanding of each of their respective profiles. In this article, I will break down each of these ETFs to attempt to determine which investments offer the most compelling risk / reward tradeoff.

Currently, there are a total of 7 investable ETFs that focus on cannabis cultivation, production, distribution, use, etc. Below, they are listed by daily trading volume.


Ticker Daily Volume (in USD) Total Assets (in USD) Expense Ratio:
MSOS 21.5M 561M 0.74%
MJ 18.9M 1.52B 0.75%
YOLO 3.7M 346M 0.75%
POTX 3M 178M 0.51%
CNBS 2.5M 142M 0.75%
THCX 1.5M 151M 0.75%
TOKE 283K 39M 0.42%

Unfortunately, generally, liquidity is incredibly low in the space, with only a combined $51 million dollars worth of shares trading hands on the average day. Additionally, TOKE is also effectively disqualified from consideration, given its low level of average volume.

At the top of the heap, there are two ETFs that clearly stick out from the pack when it comes to AUM and Liquidity: MSOS and MJ. Lets begin there.
MSOS
Launched in September of last year, MSOS is the only ETF that is purely invested in companies serving the U.S. market. Specifically, "The Fund invests at least 80% of its net assets in securities of companies that derive at least 50% of their net revenue from the marijuana and hemp business in the United States, and in derivatives that have economic characteristics similar to such securities."

As it turns out, that last bit of jargon plays a significant role in understanding the composition of the ETF.

Summarized, MSOS's top underlying holdings are: Green Thumb Industries (GTBIF), Curaleaf Holdings (CURLF), Trulieve Cannabis (TCNNF), Cresco Labs (CRLBF), Ayr Wellness (AYRWF), Terrascend Corp (TRSSF), IIPR, HarvestHealth (HRVSF) , GRWG, Columbia Care (CCHWF), 4front Ventures (FFNTF), and Planet 13 Holdings (PLNHF).
However, the fund achieves its investment objectives by almost completely allocating capital via total return swaps on those equities (a decision that was likely made due to the OTC nature of the underlying securities), which can obscure exactly how the ETF is positioned.

Symbol Name % Weight
-- Green Thumb Industries Swap Rec 9.64%
-- Curaleaf Holdings Inc Swap Rec 8.16%
-- Trulieve Cannabis Swap Rec 7.85%
-- Cresco Labs Inc Swap Rec 6.30%
-- Rec Ayr Wellness Inc 5.61%
-- Terrascend Corp Swap Rec 4.91%
IIPR Innovative Industrial Properties Inc 4.43%
-- Harvesthealth Swap R 4.40%
GRWG GrowGeneration Corp 4.08%
-- Curaleaf Holdings Inc Swap Rec 3.64%
-- Swap on Green Thumb Industries Inc 3.34%
-- Cresco Labs Inc Swap Rec 3.17%
-- Trulieve Cannabis Swap Rec 3.07%
-- Columbia Care Inc Swap Rec 2.73%
-- 4front Ventures Corp Swap Rec 2.41%
-- Planet 13 Holdings Swap Rec 2.34%
-- Jushi Holdings Inc Swap Pay -2.31%
-- Planet 13 Holdings Swap Pay -2.51%
-- Columbia Care Inc Swap Pay -2.60%
-- Terrascend Corp Swap Pay -5.34%
-- Pay Ayr Wellness Inc -5.61%
-- Cresco Labs Inc Swap Pay -6.41%
-- Trulieve Cannabis Swap Pay -7.76%
-- Curaleaf Holdings Inc Swap Pay -8.27%
-- Green Thumb Industries Swap Pay -9.73%

While the ETF's capital is deployed in a relatively unconventional manner, the potential upside here (given federal legalization) is huge, and three fold. U.S. based producers and multi-state operators would likely see the biggest operational upside in a best case legislative scenario, as conducting business and expanding in the core U.S. market becomes significantly less of a headache. Additionally, some estimates put the U.S. cannabis market at over 90% of the global cannabis market, which should obviously benefit the entrenched players the most. Finally, if legalized, it is likely that many of the multi-state operators MSOS holds could/would begin to trade as listed companies on regulated exchanges, which should increase their access to capital and broaden analyst coverage by the investment community.
Even if cannabis isn't legalized anytime soon, MSOS's portfolio companies are currently trading at a relative discount to Canadian/Global producers, like CGC, CRON, TLRY and ACB. On average, MSOS's cultivator holdings are trading at a 6.1x FWD Sales multiple, while the four biggest global producers I just mentioned are trading at an average 19.3x FWD Sales multiple, more than triple their U.S. counterparts.

This premium is likely due to a combination of factors, including the fact that the global market is growing more quickly, and that the Global operations have more ready access to capital to achieve that growth. The flip side is that MSOS is both a relative value and provides the most leverage to a legalization scenario within the United States.

MJ
If MSOS was the cheap, concentrated U.S. play, then MJ is the more expensive, broad, global play.

Launched in late 2015, the ETF seeks to track the performance of the "Prime Alternative Harvest Index", which invests in Cannabis companies, Pharmaceutical companies (that utilize cannabinoids as active ingredients), Tobacco companies, and Agricultural Equipment companies. By taking this broad approach to the sector, many of the risks that one takes by directly investing in production are dampened by the established, legal markets that pharma, tobacco, and agribusiness supply all serve. Despite this broad mandate, the majority of the top holdings in the fund are direct allocations to the expensive, Canadian-listed operators like TLRY, CGC and CRON that were mentioned previously, which means that the fund should still participate in some upside should the best case play out in Congress over the coming months.

Symbol Name % Weight
GRWG GrowGeneration Corp 9.30%
TLRY Tilray Inc 8.49%
WEED.TO Canopy Growth Corp 7.19%
ACB.TO Aurora Cannabis Inc 6.11%
CRON.TO Cronos Group Inc 6.01%
VALT ETFMG Sit Ultra Short ETF 5.39%
HEXO.TO HEXO Corp 4.11%
OGI.TO OrganiGram Holdings Inc 3.90%
VFF.TO Village Farms International Inc 3.78%
ARNA Arena Pharmaceuticals Inc 3.26%
TPB Turning Point Brands Inc 3.03%
JAZZ Jazz Pharmaceuticals PLC 3.01%
VGR Vector Group Ltd 2.94%
PM Philip Morris International Inc 2.93%
IMB Imperial Brands PLC 2.88%
XXII 22nd Century Group Inc 2.82%
BATS British American Tobacco PLC 2.82%
MO Altria Group Inc 2.75%
SWM Schweitzer-Mauduit International Inc 2.45%
SMG The Scotts Miracle Gro Co 2.32%
CWEB.TO Charlottes Web Holdings Inc 2.12%
VLNS.TO The Valens Co Inc 1.78%
HYFM Hydrofarm Holdings Group Inc 1.72%
CRBP Corbus Pharmaceuticals Holdings Inc 1.45%
ZYNE Zynerba Pharmaceuticals Inc 1.40%

While MJ remains balanced in its approach, investing in things as far flung as Scott's Miracle Grow (SMG) to Jazz pharmaceuticals (JAZZ), the expensive concentration to the non-U.S. operators I still view as suboptimal when compared to something like MSOS. There's no doubt that there's still upside to all cannabis should legalization happen, but the lack of direct U.S. exposure, combined with an already raised average valuation multiple means that the upside involved looks much less enticing than exposure to U.S. names.
YOLO
If MJ and MSOS had a frankenbaby, it would look a lot like YOLO. From the same fund management company as MSOS, YOLO takes some of the U.S. total return swap multi-state operator exposure, and combines it with some of the more global investment mandate of MJ, as the portfolio includes a few tangential positions, like Arena Pharmaceuticals (ARNA) and YCBD. The portfolio also includes a hefty weighting to Treasuries, presumably there at the moment to dampen fund return amplitude while waiting to pounce on potential opportunities. The fund prospectus does not mention this allocation, and thus it appears to be a transitory position.

The fund has a higher concentration of both U.S. and global cannabis producers than either MJ or MSOS, and it is perhaps the single most pure play hybrid cannabis producer ETF on the market. In addition, the fund has a nearly 15% allocation to VFF, an underlying equity I have a very positive view on; VFF remains one of the only companies with both U.S. and Global exposure, and it's trading at only 3.43x FWD Sales.

Symbol Name % Weight
TTTXX BlackRock Liquidity Treasury Instl 26.41%
VFF.TO Village Farms International Inc 14.49%
IIPR Innovative Industrial Properties Inc 10.99%
-- Swap on Green Thumb Industries Inc 6.99%
GRWG GrowGeneration Corp 6.83%
-- Swap on Curaleaf Holdings Inc 6.13%
TLRY Tilray Inc 5.97%
WEED.TO Canopy Growth Corp 5.91%
-- Harvesthealth Swap R 5.30%
-- Swap on Cresco Labs Inc 4.98%
-- Swap on Trulieve Cannabis Corp Ordinary Shares (Sub Voting) 4.80%
-- Columbia Care Inc Swap Rec 4.33%
-- Terrascend Corp Swap Rec 3.40%
RIV.TO RIV Capital Inc 2.71%
ARNA Arena Pharmaceuticals Inc 2.25%
JAZZ Jazz Pharmaceuticals PLC 1.52%
CWEB.TO Charlottes Web Holdings Inc 1.52%
VLNS.TO The Valens Co Inc 1.36%
YCBD cbdMD Inc 1.00%
CRDL.TO Cardiol Therapeutics Inc 0.82%
-- Columbia Care Inc Swap Pay -3.69%
-- Swap on Trulieve Cannabis Corp Ordinary Shares (Sub Voting) -4.90%
-- Swap on Cresco Labs Inc -5.02%
-- Swap on Curaleaf Holdings Inc -6.10%
-- Swap on Green Thumb Industries Inc -6.88%

While YOLO lacks some of the focus and leverage that MSOS has to a federal legalization outcome, the smart overall allocations, treasury position, and global reach make this one worth considering.
POTX
Launched in September 2019, POTX has remained one of the smaller ETFs in terms of AUM, which is likely due to its generally unfavorable investment strategy. This strategy mirror's MJ's non-U.S., global only approach. The main difference is that POTX's portfolio tracks the "Cannabis Index" run by Solactive AG, which lacks all of the broader and tangential investment mandates that are meant to buoy and diversify MJ's portfolio. What you end up with is a laundry list of expensive global operators with little to no U.S. exposure and neither the capital nor the will to truly make a dent in the U.S. market, even when/if allowed.

Symbol Name % Weight
WEED.TO Canopy Growth Corp 10.79%
SNDL Sundial Growers Inc 9.22%
CRON.TO Cronos Group Inc 9.10%
ACB.TO Aurora Cannabis Inc 8.58%
HEXO.TO HEXO Corp 8.21%
TLRY Tilray Inc 8.15%
OGI.TO OrganiGram Holdings Inc 5.14%
CWEB.TO Charlottes Web Holdings Inc 4.32%
RIV.TO RIV Capital Inc 4.21%
CRBP Corbus Pharmaceuticals Holdings Inc 3.87%
ZYNE Zynerba Pharmaceuticals Inc 3.73%
-- The Valens Co Inc 3.69%
XLY.TO Auxly Cannabis Group Inc 3.04%
-- Green Organic Dutchman Hldgs 2.66%
PCLO.V PharmaCielo Ltd 2.11%
-- Fire & Flower Inc 2.07%
AH.TO Aleafia Health Inc 2.00%
LABS.TO MediPharm Labs Corp 1.64%
TBP.TO Tetra Bio Pharma Inc 1.60%
YCBD cbdMD Inc 1.54%
CPH Creso Pharma Ltd 1.54%
CRDL.TO Cardiol Therapeutics Inc 1.52%
CAN Cann Group Ltd 1.36%

With POTX, you're only getting the global, expensive, non-legalization leverage producing Canadian-listed operators, which are all set to produce less than exciting relative performance over the medium term. Add to that a top two holding of SNDL, which trades at 40x FWD Sales, and POTX is nothing but a hard pass in my view.
CNBS
Launched in July of 2019, CNBS is a bit of an oddity within the Cannabis ETF space. Out of its top 10 holdings, only 4 are actual cannabis producers, as Tim Seymour, the portfolio manager, seems to be more interested in the ancillary businesses that win as the industry, overall, globally, grows. From AFC Gamma (The biggest cannabis financing firm) to Hydrofarm (grow beds and lighting), CNBS really seems to be the picks and shovels play within the cadre of available ETF options. There's still some direct exposure to the producer-end of the value chain with allocations to TLRY, CGC, VFF, and CRON, but that's not where the focus is.

Symbol Name % Weight
MAPS WM Technology Inc 10.00%
TLRY Tilray Inc 9.58%
VFF.TO Village Farms International Inc 8.00%
WEED.TO Canopy Growth Corp 7.88%
IIPR Innovative Industrial Properties Inc 6.52%
AFCG AFC Gamma Inc 6.50%
HYFM Hydrofarm Holdings Group Inc 6.48%
GRWG GrowGeneration Corp 6.45%
CRON.TO Cronos Group Inc 4.31%
RIV.TO RIV Capital Inc 4.01%
VLNS.TO The Valens Co Inc 3.57%
GNLN Greenlane Holdings Inc 3.56%
CWEB.TO Charlottes Web Holdings Inc 3.49%
JAZZ Jazz Pharmaceuticals PLC 3.10%
CARA Cara Therapeutics Inc 2.33%
CLVR Clever Leaves Holdings Inc 2.18%
OGI.TO OrganiGram Holdings Inc 2.13%
NEPT.TO Neptune Wellness Solutions Inc 1.63%
YCBD cbdMD Inc 1.33%
ZYNE Zynerba Pharmaceuticals Inc 1.14%
PKI PerkinElmer Inc 1.02%
LABS.TO MediPharm Labs Corp 1.00%
-- Swap on Green Thumb Industries Inc 0.91%
KERN Akerna Corp 0.83%
XLY.TO Auxly Cannabis Group Inc 0.56%

If this ETF had exposure to some of the U.S. MSO's, it would be in a great place. For investors who want to play cannabis without taking too much producer risk, it's a great option. However, it lacks the same level of leverage to legalization that MSOS and YOLO have.
THCX
Last, but not least, we come to THCX. Honestly, there isn't much to say about this fund. Its portfolio is varied, and it has exposure to a blend of producers, equipment manufacturers, and cannabinoid end-users. However, nothing within the portfolio really stands out, and with high concentrations in the expensive TLRY, CRON, CGC, and ACB, along with an uncompetitive expense ratio and poor market liquidity, there's no reason to dig deeper here. Plus, it lacks exposure to a boom in the U.S. cannabis industry, aside from the ubiquitous pick and shovel plays in GRWG, HYFM, and SMG.

Symbol Name % Weight
TLRY Tilray Inc 6.89%
WEED.TO Canopy Growth Corp 6.53%
VFF Village Farms International Inc 5.93%
GRWG GrowGeneration Corp 5.52%
CRON Cronos Group Inc 4.88%
AMRS Amyris Inc 4.69%
HYFM Hydrofarm Holdings Group Inc 4.63%
OGI OrganiGram Holdings Inc 4.50%
FAF.TO Fire & Flower Holdings Corp 4.50%
RIV.TO RIV Capital Inc 4.41%
VLNS.TO The Valens Co Inc 3.42%
YCBD cbdMD Inc 3.22%
SMG The Scotts Miracle Gro Co 2.92%
ACB.TO Aurora Cannabis Inc 2.57%
LABS.TO MediPharm Labs Corp 2.49%
WAT Waters Corp 2.44%
CBWTF Auxly Cannabis Group Inc 2.44%
CLVR Clever Leaves Holdings Inc 2.40%
GNLN Greenlane Holdings Inc 2.37%
AGFY Agrify Corp 2.36%
HEXO HEXO Corp 2.29%
PKI PerkinElmer Inc 2.20%
HITI.V High Tide Inc 2.07%
CWEB.TO Charlottes Web Holdings Inc 2.02%
NWVCF EnWave Corp 1.96%

Summary
While there are a number of options to choose from when it comes to betting on the cannabis industry, MSOS and YOLO emerge as the top two ETF picks for betting on imminent federal legalization within the United States, due to their producer-first focus, and relatively attractive average valuation entry points. CNBS also stands out as a good picks and shovels play, but should see less overall upside in the event of a best case outcome in Congress.