Is This Cannabis ETF A Buy?

In 2018, Canada legalized marijuana for recreational use. It was the first large industrialized country to do so, and the global community watched the results carefully. From 2018 to 2021, total sales topped $11 billion – and more than 67 percent of sales were for non-medical use.

When the direct economic activity was combined with indirect and induced economic activity, Canada realized a $43.5 billion boost to its GDP. That includes the income generated by approximately 98,000 cannabis industry jobs, as well as the contributions from suppliers, growers, distributors, and retailers.

Dozens of companies launched to support Canada’s cannabis industry, and some of their investors saw assets grow exponentially. A number of US investors, including several high-profile US lawmakers, added Canadian cannabis stocks to their portfolios. Still, the general sentiment is that Canadian marijuana stocks are just a drop in the bucket.

Canada’s population is just under 40 million people, while the United States boasts a population of more than 330 million. If the US cannabis industry takes off, the massive addressable market offers the potential for tremendous profits.

There are a handful of US-based cannabis companies, and one exchange-traded fund (ETF) is betting that the industry will expand.

The AdvisorShares Pure US Cannabis ETF is the first fund exclusively dedicated to the US cannabis industry. Its founders noted that the United States is the world’s largest market, and they believe it “represents the greatest untapped growth potential for cannabis.”

Are they right? Is AdvisorShares Pure US Cannabis ETF a buy?

Is Marijuana Legal In The United States?

The relationship between the United States and cannabis is complicated. On a federal level, marijuana remains illegal.

It is a Schedule I drug, meaning the government classifies it as a substance with no medical benefits and a significant risk of misuse. Federal drug laws prohibit the cultivation, distribution, and possession of marijuana, which creates a legal quagmire for the businesses that support them.

For example, financial institutions are required to prevent money from illegal activities from moving through the financial system. On a federal level, regulations preclude them from doing business with companies that grow and distribute marijuana.

However, 21 states, along with the District of Columbia and the US territory of Guam, have enacted laws legalizing cannabis. Marijuana companies in those states struggle to find the critical financial services – e.g., checking accounts and loans – that other businesses take for granted.

The general sentiment is that the United States is approaching a tipping point. The rate of state legalization is increasing, and more states are expected to follow their lead in 2023 and 2024.

As momentum builds, there is greater pressure to legalize cannabis on a federal level. When that happens, investors may see dramatic gains in their marijuana stocks.

What Is AdvisorShares Pure US Cannabis ETF?

The AdvisorShares Pure US Cannabis ETF launched in September 2020 as the first ETF to focus on US-based cannabis companies. It is actively managed, which offers investors the opportunities associated with exposure to the cannabis industry without the time and effort involved in selecting, monitoring, and trading individual marijuana stocks.

What sets the AdvisorShares Pure US Cannabis ETF apart from other cannabis ETFs is its commitment to US companies. Other marijuana ETFs are heavily invested in Canadian cannabis companies, which isn’t necessarily a problem – but it does limit access to the US market, which is the largest in the world.

Furthermore, despite legal issues on the federal level, US cannabis companies are on the cutting edge of product development.

They have a global reputation for innovation, and they have mastered the art and science of large-scale cannabis cultivation. Those factors make US companies the best choice for cannabis investors. The fact that the ETF is actively managed ensures that AdvisorShares Pure US Cannabis ETF shareholders realize more of the industry’s upside with less risk.

What Holdings Are In The MSOS ETF?

There is more to the cannabis industry than growing marijuana plants, distributing them to retailers, and selling cannabis products to consumers. A wide range of biotechnology, pharmaceutical, and other medical applications require specialized resources, and the agriculture, real estate, and finance industries contribute to the overall success of cannabis-focused companies.

The AdvisorShares Pure US Cannabis ETF considers all components of the marijuana supply and distribution chains in choosing its holdings. There are currently more than two dozen stocks in the ETF’s portfolio. Its top five holdings include:

Other key facts to consider before buying AdvisorShares Pure US Cannabis ETF include its management fee of 0.60 percent. This, combined with other expenses, puts total Annual Operating Expenses at 0.80 percent. The ETF has approximately $432 million in Assets Under Management (AUM), and just under 62 million shares are outstanding.

Is AdvisorShares Pure US Cannabis ETF A Buy?

US cannabis companies had a rough 2022. The industry was down by more than 60 percent by mid-November, compared to the larger market’s decline of around 14.5 percent. However, that could present a significant opportunity for investors who buy AdvisorShares Pure US Cannabis ETF now.

When marijuana is legalized on a federal level – and most people believe that day is coming soon – the industry and the ETF will likely realize impressive returns. Those who buy AdvisorShares Pure US Cannabis ETF at the current low price will be along for the ride when marijuana stocks go up.

Assuming marijuana is eventually legalized in much or all of the United States, the biggest risk for the industry is excessive supply. This has been problematic in Canada, where supply has outstripped demand. Until there is a balance, there is downward pressure on prices, which creates narrow margins for suppliers.

The same issue could present itself in the United States while a large number of companies compete for control of the market.

Eventually, as the industry matures, weak companies will be weeded out, and those that remain should be well-positioned to benefit from strong sales and high profits. Investors may see some volatility during the initial period, but ETFs mitigate some of that volatility. That makes AdvisorShares Pure US Cannabis ETF a better option than betting on individual stocks.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.