A New Pot ETF Just Lit Up, So Let's Get Deep Into the WEEDs

Well, we did it again. We collectively made it through another 4/20 -- uhh, holiday? While I am somewhat shocked that I do not see any Next Twitter Board Meetings is gonna be lit tweets from Mr. Musk of Tesla fame today, I am not all that surprised that yet another exchange-traded fund issuer has jumped into cannabis investing. Issuer Roundhill Investments joined the fray on Wednesday with the launch of the U.S. industry's 11th cannabis focused fund. (It's actually the 15th if you include leveraged products and two exchange traded notes, but we'll keep it simple here.) The Cannabis ETF , aside from some particularly, let's say, potent ticker game, sports a 75-basis point expense ratio, meaning that a shareholder with $1,000 invested over a calendar year would pay $7.50 in fees over that period. Regular readers will know that this is when I talk about the fund's approach and the segments the portfolio managers are focusing on. WEED is an actively managed portfolio and seeks to provide exposure to Multi-State Operators (MSOs), what the issuer describes as Ancillary cannabis businesses and foreign cannabis companies. What I'm going to do a little differently in this article is bring in the other 10 ETFs in this category and perform some overlap analysis and take a closer look at some of the holdings. Just for clarity the ETFs I'm talking are the ones in the following chart: Let's Talk Purity There are 90 unique names held across these 11 funds representing $534.5 billion of market cap. You might be thinking, I didn't know there was that much market cap in this industry, which is what I thought when I saw that figure. But when I took a closer look at those holdings, I found names like Philip Morris International , Altria Group , British American Tobacco (BATS-GB) Swedish Match (SWMA-SE) and my all-time favorite company that folks were pitching me as a cannabis name as far back as 2012, Scotts Miracle Grow . In all, there are 12 names like this in the pool representing $485 billion of market cap. Chief offenders with these names include ETFMG Alternative Harvest ETF and Cambria Cannabis ETF with these decidedly non-cannabis names (remember, I'm looking for at least 75% revenue exposure for thematic holdings) representing roughly 26% and 23% of fund holdings respectively. With those names effectively out of the pool, that leaves $58.4 billion of market cap across 78 names. Unsurprisingly, names are concentrated in Canada (41) and the United States (33) with Australia (2), Israel (1), and the UK (1) filling in the last few slots. Because some funds hold local shares and others hold the OTC traded shares via a swap facility, I ended up going with the local share tickers. In terms of popular names, Tilray Brands , Canopy Growth Corp. , Organigram Holdings , Wm Technology , and GrowGeneration Corp. are held in seven of the 11 of the funds. There are another nine names that are held by six of the 11 funds. Aside from Jazz Pharmaceuticals , none of the other names have a market cap greater than $5 billion, 64 have market caps less than $1 billion and of those, 26 are below $100 million as of the 4/20/2022 market close. Looking at WEED's 24 holdings, I like what I see here with the possible exception of smoking paraphernalia company Turning Point Brands , known for Zig-Zag cigarette rolling papers and assorted vape products. The one name that stood out to me and is held only by WEED is Akanda Corp. , a U.K.-headquartered medical cannabis company that operates out of Lesotho, a landlocked country located within the borders of South Africa. There is a fair amount of overlap between WEED and its competitor funds, with most names being held in at least five other funds and a few of them held across seven funds as well. Overall, looking at the available names in this 11-fund pool reminds me a little of the universe for Master Limit Partnerships. Last time I checked, that universe of companies totaled just over 100 names. Given the number of MLP funds out there, not to mention the invested assets in those funds, I always wondered how many more funds the underlying MLP market could manage before the ETF tail started wagging the MLP dog if you get my drift. Still, given that the combined AUM of these cannabis funds totals just under $1.9 billion I'm not too concerned yet even using a more pure-play universe of $58.4 billion. To Cannabis or Not to Cannabis? As the below chart of the largest cannabis funds indicates, cannabis investors over the last year or so could be accused of being so preoccupied with whether or not they could invest, that they didn't stop to think if they should invest. Based on the tax revenue figures from states like Colorado, which is on track for another $2 billion cannabis tax revenue year, and the increasing number of states legalizing cannabis use for adults, investors would be forgiven for being hopeful, if not bullish on cannabis stocks. In fact, Thursday marks the first time that cannabis can be purchased without a medical exemption in the state of New Jersey. Given that Colorado has about 4.5 million adults and a thriving 3,000 company strong cannabis industry employing 40,000 workers, New Jersey, with its 7.2 million adults should be able to generate some significant sales and tax revenue, right? Well, day one has the state using existing medical marijuana dispensaries, which total a state-wide 13 sites. While many other states see no issue with adding on anywhere between 5% (thank you, New Mexico) and 37% (looking at you, Washington state) it is clear that states have had no issue taking advantage of legalization to supplement tax revenues. Dispensaries and growers are also doing well financially. What's the issue with these companies and why aren't their valuations reflecting this aggressive demand curve? SAFE Colorado Rep. Ed Perlmutter, a Democrat, sent a letter this week to fellow Democratic U.S. lawmakers, New York Sen. Chuck Schumer, New Jersey Sen. Corey Booker, Oregon Sen. Ron Wyden, and Ohio Sen. Sherrod Brown, imploring them to introduce and pass the SAFE Banking Act into the Senate as it has passed House of Representatives votes six times over the past nine years. This act, if passed, would legalize cannabis commerce at the federal level, allowing cannabis companies to move out of the realm of running a cash-only business, relying on local credit unions, and in at least one case, being subject to overzealous local law enforcement confiscation of legal, in-state transportation of cannabis proceeds. Sens. Schumer and Booker maintain that passing SAFE would leave too many remaining social justice issues on the table, specifically commutation of sentences, or expungement of criminal records relating to non-violent cannabis arrests. Aside from the product, cannabis is just like any other industry in that it requires scale in order to grow, become truly successful for business owners, and unlock value for shareholders. The one thing that enables businesses to scale is the ability to manage their money and have access to financing. The problem here, as you most likely know, is that while 37 (and counting) states have legalized either medicinal or adult use cannabis sales, all of this is still illegal at the federal level. This means that not only is transporting purchased items from legal states outside that state's border, even to another state where sales are legal, a federal crime, but so is the movement of money associated with those sales. What this means is that growers and dispensaries are limited to using local credit unions, because what nationally chartered bank wants to risk its charter over cannabis sales? The same goes for payment processors and for that matter, stock exchanges and any company that operates at a national level, which is why many of these names are foreign listings that trade Over-The-Counter (OTC) here. From what I can tell, companies like Tilray are allowed to list on Nasdaq because even though they are in the business of cannabis they don't run any THC focused business in the US but instead focus on CBD products here which are not banned at the federal level or perhaps focus on the medicinal market. Honestly, I don't have a definitive answer but this makes sense to me. Rolling It Up I can tell you, as a shareholder of AdvisorShares Pure US Cannabis ETF , that the past year or so has indeed been painful. Even the step I took to repair my position by buying a June dated 25 strike call in December 2021 and another in January 2022 so far has only served to pad some market maker's P&L. Representative Perlmutter's plea to introduce and vote on SAFE before the current Senate August break is not looking good at the moment, but you never know with politics. In reviewing the various funds' holdings I did notice that Cannabis Growth ETF , while relatively small at $3.1 million shows 100% allocation to? Cash. I'm not sure that cash is the answer here. A layman's technical view of the above chart is that cannabis looks like it is going to retest March lows and assuming the sector doesn't leg down (again), set a bottom just ready for banking reform and continued state-by-state adoption of Adult-Use cannabis legislation. As with almost everything, time will tell. .

A New Pot ETF Just Lit Up, So Let's Get Deep Into the WEEDs

Here we'll hash out the differences among cannabis players and see high how Roundhill Investment's The Cannabis ETF can go.

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