The AdvisorShares Pure Cannabis ETF (YOLO), the second pure play Marijuana Exchange Traded Fund began trading on Thursday, April 18th, (it would have been fun if the market had been open on April 20th). The fund is a direct competitor to the ETFMG Alternative Harvest ETF (MJ), the only other US traded marijuana ETF.
(It should be noted that the AdvisorShares Vice ETF (ACT) also is heavily invested in marijuana and cannabis stocks, but it also has a large percentage of its portfolio in tobacco and alcohol-related business, which have no connection to the marijuana industry).
The two funds will be direct competitors, but not because they are investing in the same companies due to the differences in each fund’s principal investing strategy based on their ‘Fund Prospectus,’ but solely because they are the only two ETF’s primarily focusing on cannabis-related businesses.
YOLO’s fund prospectus states the following;
“The Fund is an actively managed exchange-traded fund (“ETF”) that seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets (plus any borrowings for investment purposes) in securities of companies that derive at least 50% of their net revenue from the marijuana and hemp business and in derivatives or other instruments that have economic characteristics similar to such securities. The Fund primarily will invest in exchange-listed equity securities, including common and preferred stock, of mid- and small-capitalization 2 companies. The Fund also may use derivatives, including total return swaps, index swaps, equity basket swaps, or futures, to seek exposure to such U.S. and foreign securities. The Advisor may seek investment opportunities through initial public offerings (“IPOs”).
In addition to its investment in securities of companies that derive a significant portion of their revenue from the marijuana and hemp business, the Fund may invest in securities of companies that, in the opinion of the Advisor, may have current or future revenues from cannabis-related business or that are registered with the DEA specifically for the purpose of handling marijuana for lawful research and development of cannabis or cannabinoid-related products.
Cannabis securities may be categorized among a wide variety of sectors and industries including agriculture, biotechnology, pharmaceuticals, real estate, retail, and finance. The types of companies that may engage in cannabis-related business include companies that conduct medical research, produce drug products, manufacture hemp products, or engage in agricultural activities, real estate activities, or financial services activities. The terms “marijuana” and “cannabis” are used interchangeably. Hemp refers to the industrial/commercial use of the cannabis stalk and seed for textiles, foods, papers, body care products, detergents, plastics and building materials. Cannabinoids are the chemical compounds secreted by cannabis plants. Cannabinoids can also be synthetically produced chemical compounds and used in lawful research and development of prescription drugs or other products utilizing cannabinoids as an active ingredient. The Advisor believes that continued legislative changes and social acceptance of cannabis in its various formats could lead to significant growth in cannabis-related public corporations. Companies involved in cannabis-related business could also benefit from significant merger and acquisition activity as the cannabis market matures. The Fund will only invest in companies that engage in cannabis-related business that is permitted by national and local laws of the relevant jurisdiction, including U.S. federal and state laws.
The Fund will concentrate at least 25% of its investments in the pharmaceuticals, biotechnology and life sciences industry group within the health care sector. The Fund is non-diversified and may invest a greater percentage of its assets in a particular issuer than a diversified fund.”
MJ’s fund prospectus states its investing goal is as follows;
“The ETFMG Alternative Harvest ETF (the “Fund”) seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the Prime Alternative Harvest Index (the “Index”).”
“The Index tracks the performance of the exchange-listed common stock (or corresponding American Depositary Receipts (“ADRs”) or Global Depositary Receipts (“GDRs”)) of companies across the globe, including U.S. companies, that (i) are engaged in the legal cultivation of cannabis, including industrial hemp, or the legal production, marketing or distribution of cannabis, including industrial hemp, products for medical or non-medical purposes (“Cannabis Companies”); (ii) engage in the lawful creation, marketing or distribution of prescription drugs that utilize cannabinoids as an active ingredient (“Pharmaceutical Companies”); (iii) trade tobacco or produce tobacco products, such as cigarettes, cigars or electronic cigarettes; (iv) produce cigarette and cigar components, such as cigarette paper and filters; or (v) engage in the creation, production and distribution of fertilizers, plant foods, pesticides or growing equipment to be used in the cultivation of cannabis or tobacco. The Index only includes companies that are engaged exclusively in legal activities under applicable national and local laws, including U.S. federal and state laws. Therefore, the Index will not include any companies that are in violation of any United States federal or state laws. Companies whose business activities are legal under state law, but not legal under federal law, are automatically ineligible for inclusion in the Index. Because the Index only includes companies that are currently engaged exclusively in legal activities under applicable national and local laws, the Index will not include any company that engages in the cultivation, production or distribution of marijuana or products derived from marijuana for medical or non-medical purposes in a particular country, including the United States, unless and until such time as the cultivation, production or distribution of medical or non-medical marijuana, as applicable, becomes legal under all local and national laws governing the company in such country.”
Based on each ETF’s investing strategy, we would think since MJ’s goal is to mimic the performance of an index, its expense ratio would be lower. However, MJ charges a 0.75% fee, while YOLO comes in at 0.74%. While the fee difference is extremely small, it does show AdvisorShares and YOLO’s management team understands it is going to be compared to MJ.
From a portfolio standpoint, it's hard to say how similar the two funds will look once YOLO builds out its holdings, but based on each fund investing strategy in their respected prospectus’s, I would imagine the two funds will be very different. A few of the reasons I feel that way is, for example, MJ clearly states it will invest in the tobacco industry. YOLO has no mention of the tobacco industry, so besides investing in Altria (MO) or another company who has an ownership stack in a marijuana company, I wouldn’t imagine seeing tobacco companies in the YOLO portfolio.
Another big difference could be due to the ‘wording’ in the two investment strategies when it comes to marijuana and its ‘legality’ issues. YOLO states
“The Fund will only invest in companies that engage in cannabis-related business that is permitted by national and local laws of the relevant jurisdiction, including U.S. federal and state laws.”
However, MJ takes its explanation of which marijuana-related companies are eligible to be owned a few steps further, saying
“The Index only includes companies that are engaged exclusively in legal activities under applicable national and local laws, including U.S. federal and state laws. Therefore, the Index will not include any companies that are in violation of any United States federal or state laws. Companies whose business activities are legal under state law, but not legal under federal law, are automatically ineligible for inclusion in the Index. Because the Index only includes companies that are currently engaged exclusively in legal activities under applicable national and local laws, the Index will not include any company that engages in the cultivation, production or distribution of marijuana or products derived from marijuana for medical or non-medical purposes in a particular country, including the United States, unless and until such time as the cultivation, production or distribution of medical or non-medical marijuana, as applicable, becomes legal under all local and national laws governing the company in such country.”
The first sentences are essentially the same, but MJ clearly rules out a lot more of the US-based marijuana companies when it states it will only own companies that engage in legal activities under national and local laws, including the US. Since marijuana is still considered an illegal drug under federal law, that would rule out essentially all US-based marijuana companies.
Based on the differences in the prospectuses, it will be interesting to see how the two funds truly differ in terms of their holdings and their performance.
One possibility based on the ‘lack’ of wording in the prospectus is that YOLO will own positions in US-based marijuana companies because if it does and the US Federal Gov legalizes marijuana, the fund would have massive upside.
Regardless though of whether the two funds have very similar holdings or they look like they are investing in two different industries, competition is always better for the consumer. Which means, we could also see lower expense ratios from the two funds as well as some smaller customer benefiting changes.
Since YOLO literally just started trading, we have very little information, but check back in the next few weeks as I will have a follow-up report detailing out more of YOLO’s holdings as that information is released. Until then, just remember only to risk what you can truly afford to lose!
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not own shares of any equity mentioned at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
My only question refers to the alcohol and tobacco companies that are expanding to include infused drinks and tobacco that many companies are looking to offer. Are these companies included in either of these?