The Secret Sauce Behind The Best Performing Cannabis ETF In Canada

By Javier Hasse and Eric TerBush.

“This is going to be happening now, it’s going to be happening over the course of the next few years."

These words, said on the day cannabis was legalized in Canada by Evolve ETF’s Chief Investment Officer Elliot Johnson, proved to be almost prophetic. Around the world, cannabis’s legality and profitability have rapidly gained momentum.

Some of those may have gained their wealth through the Evolve Marijuana ETF SEED EVVLF, which, in the last year, has delivered the best performance among all cannabis ETFs.

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Interested in learning more about the secret sauce behind the fund’s impressive performance, Benzinga recently sat down with Elliot Johnson and discussed the inception of SEED, how Evolve ETF manages its portfolio, and the importance of being ready, willing and able to respond to price movements.

Evolve ETF’s SEED

Evolve launched SEED on the Toronto Stock Exchange roughly 14 months ago. Since then, its unique management style and performance have accumulated a 33.52% year-to-date return.

“Looking at how to build the product, we first thought about what kind of index we could develop. There was always the question: if we don’t want to go the index route, can we find somebody who’s got a track record in asset management?" said Johnson.

“Of course, it’s a brand-new sector, there’s no such thing as anybody with a track record. The problem with the index was that in an industry with this much volatility, you might end up holding the right things, but you hold them in the wrong weights at the wrong time. That to us seems to be great inefficiency in the index approach.”

Recognizing this, Evolve chose to embrace rapid active management rather than relying on the index approach.

Related: Discussing Canada's New US-Focused Cannabis ETF With Evolve Funds Group

“It is the combination of portfolio construction, fundamental analysis of the names, as well as an overall risk management layer. That is how we’ve done it and it’s how we’ve been able to outperform the Index over the past year,” said Johnson.

“The bottom-line is that we’re not married to a single weight, so it’s not like we comeback in line to a previously set model. If something has moved two standard deviations in a couple of weeks, we want to react to that, because that’s not likely to happen again over the next few weeks.”

SEED’s holdings are broadly-speaking, standard for a cannabis ETF. However, their ability to react and change their holdings is the catalyst for SEED’s performance.

“I really think it is because of the weighting we have and our willingness to respond to price movements quickly. It comes down to portfolio construction and management. You can just buy and hold the basket of names we have in our top 10,you’re going to have a lot more volatility, which is going to lead to a lower long-term return,” said Johnson “We’re not using techniques that other managers are unaware of, we just believe we can apply them to this market successfully and to benefit from the volatility rather than suffer it.”

Even SEED has taken hits during the most recent quarter. While its midterm hits may have been less severe than broad indices like the Horizons Marijuana Life Sciences Index ETF HMLSF, downward movement in a volatile market like cannabis can test the endurance of any fund.

“We take the view that we can’t turn losses into profits. This is not an absolute return strategy where we are willing to go short the market. We are constrained. What we’re trying to do is be more defensive where we can,” said Johnson.

“It’s been a very volatile year for equities generally in the past six months and there’s not really a catalyst imminently here in the Canadian market. To some degree, people have also been looking more to the U.S. market over the past three or four months. Those things add up, but we still think there is a lot of opportunity in Canadian names and we continue to be excited about it.”

The top holdings of the Evolve Marijuana ETF are:

1. Aurora Cannabis Inc ACB
2. Canopy Growth Corp CGC
3. Hexo Corp HEXO
4. Charlotte's Web Holdings Inc CWBHF
5. OrganiGram Holdings Inc OGI
6. Cronos Group Inc. CRON
7. Tilray Inc TLRY
8. Neptune Wellness Solutions Inc NEPT
9. Valens Groworks Corp VGWCF
10. CannTrust Holdings Inc CTST

Photo courtesy of TMX, parent company to the TSX.