Cannabis stocks have become some of the most popular investments on the planet, and across the globe, investors are trying to figure out how best to capitalize on the growing trend toward making marijuana legal. Some have done a good job of picking out top-performing individual marijuana stocks. But for those who would rather bet on the entire industry through an exchange-traded fund, just about the only option made specifically for U.S. investors was ETFMG Alternative Harvest ETF (MJ -5.57%).

Alternative Harvest has climbed above $1 billion in assets under management, showing just how heavy demand is for a marijuana ETF. Now, there's new competition in the cannabis ETF space, and many investors are taking a first look at AdvisorShares Pure Cannabis (YOLO -2.42%) as a possible alternative to Alternative Harvest.

Going active on pot stocks

The AdvisorShares cannabis ETF just started trading on the NYSE Arca exchange on April 17, but already it's started to generate a lot of interest. With Alternative Harvest typically seeing volume of around 1 million shares per day, AdvisorShares' showing of roughly 275,000 might seem lackluster. Yet for a fund that has just $15 million in assets under management, the amount of interest that the new marijuana ETF is getting is a promising start for the upstart fund.

Two fingers holding a marijuana leaf, with cannabis plants in the background.

Image source: Getty Images.

Perhaps the most interesting way in which the Pure Cannabis ETF differs from Alternative Harvest is in its investment philosophy. Pure Cannabis takes an active approach toward choosing marijuana stocks, with portfolio manager Dan Ahrens and his team of analysts working to select the cannabis companies they believe will perform the best in the current environment.

By being able to adjust its portfolio much more quickly than an index-driven ETF like Alternative Harvest, Pure Cannabis hopes to react faster to changing trends in the rapidly evolving cannabis market. In particular, Pure Cannabis will be able to add newly available stocks to its portfolio as soon as they're available to the general public -- rather than having to wait for a quarterly rebalancing.

Overcoming a key hurdle

When AdvisorShares first filed to offer Pure Cannabis, there was one important obstacle that it needed to overcome: finding a custodian willing to work with the fund. Because of the complex legal framework governing cannabis in the U.S., many financial institutions have shied away from dealing with funds that concentrate on marijuana stocks -- even those operating in jurisdictions in which cannabis is completely legal. Alternative Harvest has had its own experience with this, and it had to switch custodians last fall in response to concerns from its previous custodial institution.

However, AdvisorShares managed to enlist one of the most reputable companies in the industry to serve as its custodian. Bank of New York Mellon acts as Pure Cannabis' custodial institution, lending its experience to build confidence in the staying power of the new ETF.

Trying to make a splash

Looking at Pure Cannabis' holdings, you can see a definite shift from the approach of Alternative Harvest. The two ETFs don't share any of the same names in their respective top five holdings, with Pure Cannabis choosing to concentrate more on the smaller companies that have more recently made their way into the spotlight. For instance, Green Organic Dutchman tops the holdings list, while CannTrust, OrganiGram, Aphria, and Innovative Industrial Properties round out the top stocks in Pure Cannabis' portfolio. Together, they make up 36% of the fund's assets.

That's not to say you won't find the mid-cap giants of the cannabis space within the AdvisorShares marijuana ETF. But industry leaders like Canopy Growth and Aurora Cannabis get much smaller 4% to 5% allocations, rather than the 8% to 10% weightings they get within Alternative Harvest.

Pure Cannabis has also tried to establish lower costs, although the difference is trivial. With a total expense ratio of 0.74%, Pure Cannabis comes in under the 0.75% that Alternative Harvest charges -- but only by a token amount that's insignificant.

See how Pure Cannabis does

With fewer shares outstanding, the Pure Cannabis ETF comes with greater liquidity risk than Alternative Harvest, and that might make some conservative cannabis investors want to wait until the fund has better established itself. However, with its active approach, Pure Cannabis stands a chance to outperform Alternative Harvest over the long run.

It will be interesting to see what happens to the two ETFs' relative asset levels if the upstart produces superior returns coming out of the starting gate.