The AdvisorShares Pure Cannabis ETF (YOLO) offers targeted exposure to a portfolio of companies involved with marijuana and hemp. The emerging-market segment has seen strong growth over the past decade supported by favorable regulatory changes in the U.S., Canada, and other countries globally supporting the acceptance of cannabis as an important industry. Indeed, the trend towards broader legalization took a step forward during the 2020 U.S. elections with several new states opening the door for medicinal and recreational commercialization which has driven renewed bullish sentiment into the group. The YOLO ETF is up over 20% in just the past month, and gaining momentum as the underlying holdings benefit from an improving growth outlook. We are bullish on the fund as we see it as one of the best ways to invest in cannabis over the long run.
(Seeking Alpha)
YOLO Background
The AdvisorShares Pure Cannabis ETF is unique in that it is actively managed and thus not meant to follow or track a particular index. Keep in mind that “cannabis” stocks, a term used interchangeably with “marijuana” includes companies in various industries including agriculture, biotechnology, pharmaceuticals, real estate, retail, and finance.
Within the investment universe of the publicly-traded cannabis stocks that derive at least 50% of their net revenue from the marijuana and hemp business, the investment manager further employs a fundamental screening process. Companies are included that are believed to be establishing a dominant position in their respective markets. Furthermore, the fund focuses on cannabis-related companies with high growth and expansion opportunities.
(Source: AdvisorShares)
It’s worth noting that the portfolio manager is Dan Ahrens, a recognized expert in the cannabis space with published works describing the opportunity for investing in “vices.” Mr. Ahrens has made the connection that the outlook for cannabis draws parallels to the post-prohibition era when a ban on alcoholic beverages was repealed leading to a major boom for the industry.
As mentioned, one of the storylines from the recent U.S. elections was the passage of ballot measures in Arizona, Montana, New Jersey, and South Dakota that legalizes the possession of marijuana. Separately, voters also approved medicinal cannabis in the state of Mississippi. 15 states have now either enacted or have approved adult-use legalization laws, while 36 states have either enacted or have voted to approve medical marijuana.
(Source: DISA)
While a sweeping federal legalization reform is still missing, the trend here represents a growing market of consumers that are ready to be addressed by the leading cannabis companies. Beyond the U.S., a similar wave of changing perceptions is driving legislative actions in various countries. Thus far, Uruguay and Canada are the only two countries to legalize cannabis nationwide while Mexico is taking that step with a recent vote of approval in its senate. The point here is that the opportunity is global with increasing demand for a variety of related products and services of the budding industry.
YOLO Portfolio
The YOLO ETF currently includes a portfolio of 41 companies across both equities and swaps. For reference, the active nature of the fund’s strategy allows the portfolio manager to utilize derivatives such as total return swaps that capture the exposure of the underlying equity return through an alternative security structure. The purpose of utilizing these derivates are varied but often incorporate leverage while limiting the cash outlay. Depending on the terms, swaps can often generate regularly portfolio cash flows that can help better manage liquidity and enhance trading opportunities.
(Seeking Alpha)
Currently, the largest equity position in the fund is an 11% holding in Village Farms International Inc. (VFF) which owns and operates agricultural greenhouse facilities used for marijuana cultivation. Innovative Industrial Properties Inc. (IIPR) with a 10% weighting in the fund is structured as a REIT and leases specialized medical marijuana facilities.
GW Pharmaceuticals plc ADR (GWPH) with a 7% weighting is developing therapeutics based on cannabinoid compounds. Its ‘Epidiolex’ drug was approved by the FDA this year to treat seizures associated with Tuberous Sclerosis Complex. There is also GrowGeneration Corp. (OTC:GRWG) which has been referred to as the “Home Depot of Weed” with its network of retail stores focusing on at-home hydroponic equipment for consumers. GRWG has seen explosive growth this year and the stock is up 669%. Aphria Inc. (OTC:APHA) with a 5% weighting is one of the largest commercial producers of cannabis in Canada with global distribution. Overall, it’s a diverse portfolio with exposure to the most important names in the cannabis segment.
As mentioned, the cannabis sector has been hot in recent weeks, and the YOLO fund is now up 26% in 2020 on a total return basis. Across the top-10 company holdings, big winners in the past month include VFF up 74%, GRWG up 53%, and APHA with a 40% rally.
Data by YChartsAnalysis and Forward-Looking Commentary
We are bullish on cannabis and view the attraction of the YOLO ETF being its active management and diversified exposure to the segment. It’s a fast-evolving market segment and the professional management by an expert in the industry can be valuable to “weed out” through the large universe of emerging companies.
To that point, we highlight that YOLO has been the top-performing cannabis ETF over the past year, up 29% on a total return basis. Investors have alternative choices in Spinnaker Cannabis ETF (THCX), Global X Funds Cannabis ETF (POTX), Cambria Cannabis ETF (TOKE), and Amplify Seymour Cannabis Alternative Plant Economy ETF (CNBS) which are all smaller by assets under management. Indeed, YOLO has outperformed all of these funds over the past year, in some cases significantly considering the 33% loss by POTX, 6% decline from THCX, and flat return from TOKE. With longer-term data over a period where all five funds have been in existence, YOLO also has the best performance in the group.
Data by YChartsWhile each of these funds feature a different strategy and underlying portfolio of cannabis stocks, the results suggest the active management from AdvisorShares has been able to generate value. In this regard, YOLO’s 0.75% expense ratio can be justified. It’s also worth mentioning that the fund yields 2.1% which is achieved through the use of its swaps strategy on certain holdings that generate income. The underlying holding in IIRP is a notable dividend stock that also supports the yield.
Our bullish case for cannabis is that as the segment matures, the leading companies will be able to consolidate market share and capture a leading position in their respective niches. The trend in legalization should continue representing increased upside as the companies see expansion opportunities. To the upside, any further favorable regulatory changes or the possibility of plans to address reforms in the U.S. in a new Biden administration would further support sentiment in the group, although nothing has been officially announced.
On the other hand, the risk to cannabis is still centered around the same regulatory uncertainty. Questions regarding industry financing and banking laws along with international trade policies for the products could limit long-term growth potential. As it relates to the YOLO fund, the use of derivatives represents some additional financial risks that could magnify losses in case the market corrects lower. Overall, cannabis remains a high-risk and speculative industry that is subject to swings of wide volatility. Take a look at the fund prospectus for a full list of risks and disclosures.
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Disclosure: I am/we are long YOLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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