Which US Cannabis Market ETF Looks Better?

The ETFMG Alternative Harvest ETF (MJ) was the first cannabis-focused ETF to hit the market in late 2017 when it was converted by a Latin American real estate fund. Since then, it has consistently been the largest marijuana ETF available, with around $ 1.6 billion in assets under management.

Like most ETFs in this space, it focuses on the global cannabis market, which is mostly made up of the US, Canada and the UK. While this industry is growing rapidly in terms of adoption and legality around the world, it looks like the U.S. market may experience the greatest growth in the next few years.

Global cannabis market share

The US legalization story is both the biggest potential driver of growth and the biggest headwind. At the state level, more and more states are legalizing or decriminalizing marijuana use at various levels, but the federal government has yet to fully jump on board. The results of a number of electoral initiatives over the past few years have shown Americans continue to be okay with cannabis, and a federal legislative package approving marijuana use at either the medical or recreational level (or both) could have a lot of growth potential in the U.S. market .

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US cannabis market growth

As it stands today, few states are still objectors making marijuana use completely illegal.

State legalization of marijuana

State legalization of marijuana

The ETFMG US Alternative Harvest ETF

That could mean that focusing your investments in the U.S. cannabis market rather than the global market might add a little more pop to your portfolio. The AdvisorShares Pure US Cannabis ETF (MSOS) Already exists, but its year-to-date yield is by far the lowest of the 7 major marijuana ETFs in existence as U.S. yields continue to lag. Going forward, I still wish for MSOS to excel in this area, but there is another ETF recently launched that is trying to take advantage of the same market.

The ETFMG US Alternative Harvest ETF (MJUS) will have much of the same portfolio building process as MJ, but will focus solely on the U.S. cannabis market.

MJUS-ETF

MJUS-ETF

According to fund documents:

The Fund seeks to achieve its investment objective by investing in the securities of companies that generate at least 50% of their net income from the “cannabis business” (as defined below) in the United States, and in derivatives with economic characteristics, which are such securities resemble.

The cannabis business is defined as: (i) cultivation, production, marketing or distribution of cannabis, including industrial hemp, (ii) manufacture, marketing or distribution of products containing products derived from cannabis, (iii) manufacture, processing, marketing, transportation or distributing prescription products, drugs, nutritional supplements, or foods containing cannabis1 derived products; or (iv) providing products or services designed for or used by companies in the cannabis industry, including technology, real estate or financial services.

The Fund will not invest directly in or own any company engaged in cannabis-related businesses except as permitted under national and local laws in the relevant jurisdiction, including federal and state laws.

One of the problems I’ve always had with MJ is the final bullet points in the qualification criteria listed above. It throws out a fairly wide web that allows for the inclusion of companies that have little direct involvement in the cannabis industry or whose presence is only a small part of their overall business. Companies like Scotts Miracle-Gro (SMG), Altria (MO) and Philip Morris (PM) end up in the portfolio.

MJUS has the same ability to pick up these names, but mostly sticks to more straightforward industry names.

MJUS holdings

MJUS holdings

It’s not a perfect portfolio, but I believe it does a much better job than MJ at portfolio building, and that’s an important step in the right direction.

MJUS ‘expense ratio of 0.75% is identical to MJ’s, but with total assets of just $ 7 million so far, it’s probably a little too early to be investable. It’s also worth noting that while MJ tracks the Prime Alternative Harvest Index, MJUS is actively managed.

MJUS vs. MSOS

Given that investors now have two US-targeted cannabis ETFs to choose from, which one should investors choose? MSOS has been comparatively longer for about 9 months and has amassed a much larger asset base of $ 900 million, putting MSOS slightly ahead from a pure liquidity and investability perspective. MSOS’s 0.74% net expense ratio is virtually the same.

We already know that MJUS looks very different from MJ, not just because it focuses only on US companies, but because it focuses on more active growth strategies than just the biggest companies like Tilray (TLRY) and Aurora Cannabis (ACB ) to invest). MSOS takes a similar approach that ultimately creates a similar portfolio to MJUS.

MSOS top stocks

MSOS top stocks

The top 4 holdings of both ETFs are identical, although MSOS is a bit more top-heavy. All of the largest collections of MSOS also appear in MJUS. You have to go as far as Goodness Growth Holdings (GDNSF) to find a stock that is not in MJUS.

While there are modest differences between the two ETFs, it can be assumed that they will continue to remain highly correlated with each other and of course the performance will be quite similar based on the current iterations of these portfolios. Because both are actively managed, the compositions can differ over time, which leads to some variation in forward returns.

Conclusion

Both MSOS and MJUS are actively managed (which I see as a benefit in the cannabis space). Their expense ratios are essentially the same. Their portfolios all contain the same top positions, albeit to different degrees.

The only significant difference I see between the two at this point is the size. MSOS, with $ 900 million in assets, has a distinct advantage over MJUS with just $ 7 million in assets. The trading margins at MJUS are currently more than twice as high as at MSOS, which makes trading noticeably more expensive. As MJUS gets bigger over time, I expect these spreads will go down, making the two more comparable.

For now, I believe MSOS is still a better choice for exposure to the US cannabis market.

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