According to one cannabis exchange-traded fund (ETF) manager in the US, investors are still making decisions based on misunderstandings in the space.
Dan Ahrens is the managing director and chief operating officer at AdvisorShares and the active manager for the AdvisorShares Pure Cannabis ETF (ARCA:YOLO). Ahrens told the Investing News Network (INN) he is fed up with the misinformation that dominates cannabis investments.
“I think people need to be more educated about (how) all cannabis stocks aren’t the same,” he said.
Ahrens used his own fund as a direct example of how investors still struggle to differentiate what takes place in the cannabis investment arena.
He expressed frustration at seeing discussions about state-level legalization in the country accompanied by mentions of big cannabis companies that have no option to enter those markets at the moment.
“There’s a great deal of flat out stupidity in cannabis investing out there,” said Ahrens. “And more people need to get educated about investing in the right companies.”
The fund manager is a big believer in the upside attached to the US market at large, but that upside is currently only available to a few names in the cannabis stock universe.
Cannabis is a Schedule I controlled substance in the eyes of the US federal government; this ruling prevents larger Canadian corporations from stepping into the country and means they can’t operate without the risk of illegal action that could impact their public listings and bank relationships.
“The US is a much bigger market, a much better market, and now this year the US market is performing a lot better than most of the Canadian market,” Ahrens said.
Due to those restrictions at the federal level, the companies operating and performing in the US are the much-touted multi-state operators. These cannabis companies are US operators with assets in states with legal frameworks that allow for the sale and distribution of cannabis.
There is one caveat for Canadians, and that is the hemp-derived CBD space. Thanks to the 2019 Farm Bill, hemp is recognized as a separate compound from cannabis by the US government, meaning that hemp and its derivatives are allowed to be sold.
But what happens if the US opens the doors to legal cannabis across the country? Ahrens said he is not expecting to see a change like that anytime soon.
“I don’t see any time in the foreseeable future a true federal across-the-board legalization,” he said.
He clarified that this doesn’t mean there won’t be more states passing cannabis laws and installing programs for companies to operate — but Ahrens is not expecting a top-down policy on legalization in the same way Canada legalized the drug.
How active management benefits YOLO
YOLO is an actively managed ETF, meaning Ahrens and his team are tasked with evaluating the performance of its holdings and directly trying to obtain the best results. That’s different from the more established index approach for ETFs, where funds perform based on the indexes they model.
The active management advantage has proven effective for AdvisorShares as its YOLO fund has been capable of weathering the difficult investment year for cannabis. While several of its index-style cannabis ETF peers have seen double-digit losses, YOLO has stayed close to even.
As of market close on Thursday (August 27), the fund was up 1.43 percent over a year-to-date period at a price point of US$12.07. While YOLO was affected by the dip created by the impact of the COVID-19 pandemic, the fund has been able to recover since that time around February and March.
The fund manager credited the results of the fund to relying less on Canadian names and instead targeting US-operating cannabis companies.
“Sometimes the biggest companies could be some of the worst performers,” said Ahrens. “We greatly, greatly underweight the biggest Canadian licensed producers, the famous names that everybody trades way too much in, which are Canopy Growth (NYSE:CGC,TSX:WEED), Aurora Cannabis (NYSE:ACB,TSX:ACB), Tilray (NASDAQ:TLRY) and Cronos Group (NASDAQ:CRON,TSX:CRON).”
New fund from the YOLO managers
AdvisorShares plans to launch a new ETF that will be entirely dedicated to US cannabis names, according to Ahrens. The fund manager said the reason behind this new fund is investor demand.
While YOLO already offers exposure to US names by way of an intricate model to retain regulatory approval, the new fund will be focused exclusively on US cannabis companies and is set to launch on September 2. Its prospectus indicates it will carry a 0.6 percent management fee.
Both YOLO and the new fund offer access to US-based companies listed in Canada through the Canadian Securities Exchange by way of a total return swaps investment, Ahrens explained to INN.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.