AdvisorShares Pure US Cannabis ETF Gets a New Competitor 

The largest Cannabis ETF traded on a US stock exchange is the AdvisorShares Pure US Cannabis ETF (MSOS), with assets under management (AUM) of $613.9 million. 

On Oct. 12, the much smaller Roundhill Cannabis ETF (WEED) announced it would re-focus the ETF’s mandate exclusively on the largest U.S. multi-state operators, or MSOs. WEED, which has just $1.5 million in AUM, now holds just six companies, all Tier 1 MSOs with annual revenues of $500 million or more. 

Not only is WEED taking the battle to MSOS, but it’s also lowered its net expense ratio to 0.39%, making it the lowest-cost cannabis ETF available.

While this is certainly news, it doesn’t necessarily make either ETF a buy in this market environment.

However, I'd go with BLANK if I had to buy one. 

MSOS All the Way

The whole point of investing in an ETF is to gain broad exposure to a specific sector or industry: in this case, cannabis. 

MSOS does that. If you invest $1,000 in the ETF for $7.30 in annual fees, you gain exposure to 27 U.S. cannabis-related stocks with weightings between 19.74% for Green Thumb Industries (GTBIF) and 0.05% for Hempfusion Wellness (CBDHF). 

The diversification hasn't prevented MSOS from losing nearly 61% of its value in 2022. That’s almost 2.5x worse than the S&P 500. You would have been better off buying the index to protect your downside. 

In a market like this one, active portfolio management has done an excellent job of outperforming passive investing. In fact, through the first six months of the year, only 51% of large-cap domestic equity funds had underperformed the index, considerably better than active management’s performance in 2021, when 85% of large-cap domestic equity funds underperformed the index. 

So, the fact that MSOS is underperforming the index to such a degree is damning evidence against putting your hard-earned capital into the cannabis ETF.

On the other hand, the ETF could experience mean reversion over the next 2-3 years as cannabis gains greater traction across the U.S., making portfolio manager Dan Ahrens look like a genius. 

When the Biden Administration announced that it was pardoning more than 6,500 people convicted of marijuana possession under federal law in the U.S., MSOS gained 34% on the news. It’s since given back two-thirds of those gains. 

However, until marijuana is legal federally, MSOS doesn’t have a chance of returning to its all-time high near $52 in February 2019. Biden’s announcement was a nice breath of fresh air, but investors need something tangible to hang their hats on. 

WEED Is Cheaper and Better

Warren Buffett is a big believer in maintaining a focused portfolio with his best bets accounting for a large percentage of Berkshire Hathaway’s (BRK.B) $311 billion equity portfolio. Apple (AAPL) currently accounts for slightly less than 41% of the portfolio accounts for slightly less than 41% of the portfolio, with the top 10 accounting for 88% overall. The other 39 stocks account for the remaining 12%.

It’s worked out pretty well for the Omaha billionaire. 

Roundhill Investments has decided to take Buffett’s approach, and dial it up a notch, reducing its actively-managed portfolio to six of the largest U.S. MSOs available.

As a result, the six MSOs have weightings between 4.22% for Columbia Care (CCHWF) to 34.46% for Curaleaf Holdings (CURLF). MSOS’s weightings for these two cannabis stocks are 4.62% and 18.86%, respectively. 

Weed’s second-largest holding is Green Thumb Industries at 20.25%, 51 basis points higher than MSOS, which has it as its largest holding. Interestingly, MSOS’s six largest holdings -- the same six companies as WEED -- account for 79% of its total net assets compared to 100% for WEED. 

So, if I’m thinking about which ETF to buy, the fact that WEED costs 34 basis points less than MSOS and effectively achieves the same thing -- gaining exposure to the top six MSOS in America -- it seems pointless to buy MSOS to gain what some might refer to as “deworsification.”

The biggest downside to owning WEED is that it only has $1.5 million in net assets. There have been plenty of ETFs killed off with far great asset totals. No one wants to go through the liquidation process if they don’t have to. 

It’s something to consider, for sure. 

The Bottom Line

I left the decision to the end because I wanted to consider both sides of the argument before committing to a choice. 

From where I sit, if you’re willing to invest in cannabis stocks, which remain a risk-forward proposition, I would go with WEED over MSOS because it takes a more definitive stance on the U.S. cannabis industry while maintaining some diversification through the six holdings. 

However, if you’re risk averse, neither of these ETFs should be on your radar. Not by a long shot. 

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