You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Friends,
It’s been almost 8 months since we warned our readers about the AdvisorShares Pure US Cannabis ETF (NYSEARCA: MSOS), and it has been hammered. The ETF is down 43.5% since mid-October, and it is down 23.3% so far in 2023. The ETF has no index, but we think that it can be compared to the New Cannabis Ventures American Cannabis Operators Index, which has dropped 12.9% so far in 2023. Here is the chart of MSOS over the past year:
While it has dropped substantially, we want to reiterate our concerns. While we appreciate what the ETF MSOS did for the industry and for investors after launching and have seen the ETF improve a lot since it began almost three years ago, we think that MSOS as it currently stand is a dangerous way to invest. Not only is it overly concentrated in the largest names, it is also missing out on other important parts of the market by focusing on just American cannabis companies and not Canadian LPs, ancillary companies or other parts of the sector.
When we wrote about it in October, MSOS was 74% invested in the 5 largest American cannabis operators, and now it has 77%. Its top 6 holdings are 86% of the fund. While sometimes biggest can be best, we don’t believe that this is always true. In our view, it’s not true at all right now. Here are the holdings by position size:
The top name, Green Thumb Industries, represents 26%, and the second name, Curaleaf, represents 19%. These weightings are not consistent with market share or the market caps of these companies.
Our concern has been that the ETF could see liquidations, which did begin in mid-December. So far in 2023, 2.1% of the shares have been redeemed, and the reduction since mid-December has been 10.2%. We have feared that continued liquidations could result in the ETF trimming its investments, which would be a big problem given the poor liquidity in the market right now. In fact, earlier in the year, when the redemptions were greater, MSOS did make some sales in its largest holdings.
The company says that the ETF is actively managed, but we don’t think that is a good assessment based on our observations. For example, MSOS at year-end had 85% in the same top 6 names that it holds now. The fund doesn’t seem to take money out of stocks going up or put money into stocks that are down. The only thing it seems to actively manage is investing inflows and selling for outflows. It is slightly leveraged with investments 0.9% greater than the size of the ETF.
So, MSOS is down a lot, but we don’t think investors should buy it. For those that can buy its holdings, we think some of them are a much better bet. One can also find a large MSO that the fund doesn’t own that we believe looks better. We also think that there are other types of cannabis investments that make more sense. In our view, investors should avoid this highly concentrated, narrowly focused fund.
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Sincerely,
Alan & Joel
