Why Being Active Matters With This Cannabis ETF

No, cannabis exchange traded funds are not performing well to start 2020, but in the hunt for less and legitimate rebound candidates, investors may want to consider some active management.

The AdvisorShares Pure Cannabis ETF YOLO has been one of the less bad marijuana ETFs this year, indicating the fund's exposure to U.S.-based multi-state operators (MSOs), companies not often found in rival passive funds, has some merit.

YOLO features significant exposure to the likes of Green Thumb Industries GTBIF and Curaleaf Holdings CURLF, positions the ETF owns via swaps.

Why It's Important

Despite the ongoing downturn in cannabis stocks, there is some enthusiasm among analysts for Curaleaf and Green Thumb.

“Our fair value estimates are $18 per share and CAD 23.50 per share, based on a 10-year explicit forecast that assumes a nearly 37% revenue CAGR and a 2028 operating margin before plant adjustments of 32%,” said Morningstar of Green Thumb in a recent note. “At current prices, shares look undervalued as the stock trades in 4-star territory. In our view, it offers investors attractive exposure to the fast-growing U.S. market.”

Benzinga's Cannabis Capital Conference returns to Miami Feb. 24-25 with North America's largest B2B cannabis gathering, bringing together capital, cannabis executives, thought leaders and more!

While passive cannabis ETFs have been stung by large Canada exposure, including but not limited to Aurora Cannabis ACB, YOLO isn't constrained by an index that likely forbids owning swaps or OTC stocks.

“Green Thumb offers pure-play exposure to the United States, which we believe has the highest potential and fastest growth of any market,” said Morningstar. “As of 2018, U.S. recreational and medicinal cannabis have penetrated just 8% and 21% of their estimated markets, respectively. Based on our state-by-state analysis, we forecast nearly 25% average annual growth for the U.S. recreational market and nearly 15% for the medical market through 2030.”

What's Next

YOLO allocates just over 9% of its combined weight to Curaleaf and Green Thumb, both of which are plays on something that's already happening: increased cannabis legalization in the U.S.

“Its (Green Thunb) growth strategy focuses on states with large populations and limited licenses. It strategically operates in states with robust medical cannabis markets with momentum around future recreational legalization,” said Morningstar. “Two of its large markets, Illinois and Massachusetts, have already legalized recreational use.”