New SEC Filings Reveal Major Risks In Cannabis ETFs Following Recent Volatility — But There's Still Room For Optimism

Cannabis investors have been navigating a complex and volatile market, with two major ETFs, the AdvisorShares Pure US Cannabis ETF MSOS and its leveraged counterpart, the AdvisorShares MSOS 2x Daily ETF MSOX, at the center of the storm.

Both ETFs have faced considerable headwinds in the form of regulatory uncertainty and underperforming stocks in the cannabis space, new SEC filings show. Yet the potential for regulatory reform — particularly the rescheduling of cannabis under federal law — along with emerging pro-cannabis political momentum, offers a glimpse of hope that could reinvigorate these funds and the broader market.

Closer Look At MSOS, MSOX: Performance And Market Pressures

In recent regulatory filings for MSOS and MSOX, we see a mixed picture of the ETFs’ positions and struggles. MSOS, which tracks a diverse range of U.S.-based cannabis companies, is facing significant pressure due to the prolonged regulatory gridlock in the U.S. and the economic downturn that has weighed heavily on growth-oriented sectors like cannabis.

The filings reveal the ETF’s holdings in prominent cannabis companies such as Green Thumb Industries GTBIF, Verano Holdings Corp VRNOF and Trulieve Cannabis Corp TCNNF. These stocks have shown both potential and volatility, yet have been unable to escape the broader downturn in the cannabis market. MSOS reported a 1.48% exposure to Green Thumb Industries, one of the most stable multi-state operators (MSOs), but the sector's struggles have prevented these assets from delivering consistent gains.

MSOX, the leveraged counterpart of MSOS, is built for more aggressive investors seeking amplified returns. This strategy also means amplified risk, which has manifested in recent performance. The fund's investments in total return swaps involving stocks like 4Front Ventures Corp FFNTF and Verano Holdings have caused large swings in its value, with substantial losses that haven't been realized yet, as detailed in the filings. As the cannabis sector struggles, leveraged ETFs like MSOX have been particularly vulnerable to magnified losses.

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Structural And Liquidity Challenges In Cannabis ETFs

The filings also shed light on some of the structural challenges these ETFs face. Both MSOS and MSOX hold complex financial instruments, including total return swaps on major cannabis companies like Green Thumb Industries, Verano Holdings, and 4Front Ventures. While these swaps can provide potential gains, current market conditions have pushed many of these positions into significant losses.

For instance, MSOX has seen depreciation on TRS positions, including a $462,000 loss on 4Front Ventures and a $1.22-million depreciation on swaps tied to Vapen MJ Ventures Corp.

These derivative positions are often tied to companies that are under pressure, not just from declining stock prices but also from liquidity constraints and funding challenges. As detailed in the filings, many of the assets in MSOS and MSOX are classified as either less liquid or moderately liquid investments. This lack of liquidity can exacerbate volatility, particularly in leveraged products like MSOX, where the market's swings are magnified.

Additionally, regulatory uncertainty, especially around U.S. federal cannabis reform, has kept institutional investors cautious, limiting the inflows into cannabis stocks and ETFs. These structural factors have contributed to the subdued performance of MSOS and MSOX.

Potential Cannabis Rescheduling: Beacon Of Hope

Despite these challenges, potential catalysts could significantly alter the landscape for cannabis stocks and ETFs. One of the most prominent developments on the horizon is the potential rescheduling of cannabis from a Schedule I to a Schedule III controlled substance. This shift would be a monumental step for the industry, easing many of the financial and operational burdens that cannabis companies face under federal prohibition.

Rescheduling cannabis would alleviate major obstacles related to taxation (particularly the burdensome Section 280E of the tax code), banking access and investment restrictions. This move could unlock broader institutional investment, which has been largely absent from the cannabis sector due to its federal illegality.

It would also allow cannabis companies to deduct ordinary business expenses, vastly improving their profitability. The market is already speculating that rescheduling could prompt a wave of new investments into the sector, lifting ETFs like MSOS and MSOX.

Legislative Momentum: Harris, Walz's Pro-Cannabis Formula

On the legislative front, pro-cannabis political figures such as Democratic presidential nominee Vice President Kamala Harris and her running mate Minnesota Gov. Tim Walz are helping drive momentum for cannabis reform. The Harris-Walz formula seeks to advance legalization and cannabis-friendly policies that focus on progressive reform and social equity initiatives. Harris has been a vocal advocate for cannabis legalization and her influence, along with growing bipartisan support, could accelerate progress in federal reform efforts.

Walz, meanwhile, has been instrumental in advancing state-level cannabis reforms and advocating for broader change at the federal level. His focus on legalization and progressive cannabis policies in Minnesota could serve as a blueprint for federal policy, should he be elected. These initiatives, coupled with broader political momentum, create a more favorable environment for cannabis legislation, which could ultimately benefit ETFs like MSOS and MSOX.

Key Catalysts: Banking Reform, International Expansion And SAFE Banking

Beyond rescheduling, other legislative and regulatory changes could offer significant tailwinds for the cannabis sector. The SAFE Banking Act, which aims to provide cannabis businesses with access to traditional banking services, is another key area of focus. Cannabis companies have limited access to banking, forcing many to operate in cash — a risky and inefficient model that stifles growth. Passage of the SAFE Banking Act would provide cannabis companies with much-needed financial services, lowering operational risks and making the sector more attractive to institutional investors.

International markets also present growth opportunities for cannabis companies. Germany, for example, has emerged as one of the most significant markets for medical cannabis in Europe and recent regulatory developments suggest that the country could become a global leader in cannabis. U.S.-based cannabis companies, many of which are part of MSOS and MSOX's portfolios, have already begun expanding internationally and success in international markets could help offset some of the domestic challenges.

The Road Ahead For Cannabis ETFs

While the environment remains challenging, the future holds several potential catalysts for the cannabis sector. Cannabis rescheduling, legislative reform and international expansion offer promising opportunities for growth. As these developments unfold, they could provide much-needed relief for ETFs like MSOS and MSOX, which are poised to benefit from a more favorable regulatory landscape and the subsequent influx of institutional capital.

For investors, the key lies in navigating the current volatility while staying attuned to the potential for a turnaround driven by regulatory and legislative progress. ETFs like MSOS and MSOX, though battered by recent market conditions, remain well-positioned to capture the upside if these catalysts come to fruition. The road ahead for cannabis ETFs may be rocky, but with the right mix of policy changes and market momentum, the sector could see a significant rebound in the not-too-distant future.

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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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