Canada’s exchange-traded fund (ETF) market, though growing, is tiny compared to its U.S. counterpart. Not surprising, however, considering the number of listed cannabis-related companies north of the border, Canada is besting its southern neighbor with its growing roster of listed marijuana ETFs.
Since late 2017, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has had the U.S. marijuana ETF market to itself, but that changed last week with the debut of the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO).
YOLO’s debut means more to the U.S. marijuana ETF space than simply doubling its size. It’s that YOLO is the first marijuana ETF in the U.S. to be born as, well, a marijuana ETF. The aforementioned MJ was born as a different fund and converted to a cannabis ETF in late 2017.
As well, YOLO is the first marijuana ETF to have “cannabis” in its name. (Don’t underestimate the marketing edge that affords.) Finally, YOLO is actively managed, which could give investors refreshed opportunity in the cannabis ETF space. MJ is a passively managed portfolio.
YOLO “seeks long-term capital appreciation by investing in both domestic and foreign cannabis equity securities,” according to AdvisorShares. “YOLO is designed to fully invest for pure cannabis exposure under the guidance of a deeply experienced portfolio management team navigating the emerging cannabis marketplace.”
The new marijuana ETF debuts at an interesting time for the wider pot stocks market. Broadly speaking, cannabis names have delivered impressive gains this year, but some have recently encountered headwinds as highlighted by a almost 6% loss this month for MJ.
“Cannabis stocks have been a volatile but largely outperforming group in 2019. Yet Bank of America Merrill Lynch warns that while some companies are living up to the hype, others have risen too far, too fast, and investors could get burned,” reported Teresa Rivas in Barron’s last week.
While YOLO is bound to hold some of the same stocks as MJ, overlap between the two marijuana ETFs is not significant, at least not yet, and the actively managed fund may have more flexibility to target opportunities in the fast-growing cannabidiol (CBD), medical marijuana and hemp markets.
As of its debut, the YOLO portfolio included 23 stocks, with none more than 8% of the holdings. The top two names were The Green Organic Dutchman Holdings Ltd. (OTC:TGODF) and Toronto-listed OrganiGram Holdings Inc. (TSXV:OGI.V).
Nearly 7% of Americans are already using cannabidiol, placing the potential market opportunity for the much-hyped cannabis compound at $16 billion by 2025, according to a new analysis by Cowen & Co. cited by Fortune in February.
Myriad applications for hemp, including animal care, beverage and food, construction materials, furniture, personal care, textiles and more, make hemp exposure potentially desirable for cannabis investors right now and over the long-term. By some estimates, the global hemp market will have experienced compound annual growth of 14% from 2014 through 2025.
Bottom Line on YOLO
The bottom line with any new ETF, particularly one as recent as YOLO, is that time will tell if investors will embrace the product. As MJ, with its nearly $1.2 billion in assets under management, confirms, there is appetite for marijuana ETFs in the U.S.
YOLO has a modest fee advantage with an annual expense ratio of 0.74%, or $74 on a $10,000 investment. That is one basis point cheaper than MJ and probably not enough to get investors to dump profitable positions in MJ to move over to the new marijuana ETF because those sales would trigger taxable events that will cost more than the savings offered by YOLO over the competing marijuana ETF.
For investors who’ve not yet been involved in a marijuana ETF, YOLO could be worth considering over the near term.
Todd Shriber does not own any of the aforementioned securities.