The 5 Biggest Bets From Marijuana's Newest ETF

Investors have been watching the marijuana industry as a hotbed of activity for months now, and 2019 has been extremely good to the top players in the fast-growing cannabis space. For those willing to buy individual marijuana stocks, a rising number of companies available to U.S. investors on major stock exchanges have offered new opportunities.

Yet many prefer to use exchange-traded funds to invest in a more diversified manner, and a brand-new marijuana ETF just came onto the scene. AdvisorShares Pure Cannabis ETF (YOLO 0.31%) is an actively traded fund, and lead manager Dan Ahrens and his team have selected five pot stocks as their favorites to produce even better returns than the overall industry. Below, we'll look briefly at each of the five and why the Pure Cannabis ETF has more than 35% of its fast-growing asset base invested in them.

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The top five Pure Cannabis stocks

Below is the list of top holdings in the Pure Cannabis ETF as of April 28.

Data Source: AdvisorShares Pure Cannabis ETF. As of April 28.

None of these stocks is among the marijuana companies with the highest market capitalization in the business. But for a fund that's trying to differentiate itself from index-tracking alternatives that are more likely to give higher weights to the most popular names in cannabis, it makes sense for Ahrens and his management team to go in a different direction.

What makes Pure Cannabis ETF's five biggest bets stand out

With the entire cannabis industry growing at a lightning-fast pace, it takes more than just above-average gains in sales to justify a top pick. Each of these five businesses has something that could give it a competitive edge over its closest competitors over the long run:

• The Green Organic Dutchman is trying to cater to high-end customers by seeking to produce premium organic cannabis, and that's a strategy that analysts at Jefferies believe could produce 50% gains for the pot stock from recent levels. The company has been slow out of the gate, having failed to produce any revenue from selling organically grown cannabis in the first quarter of 2019. However, it projects annual production of 219,000 kilos, which would put it among the top growers in the budding industry.
• CannTrust is one of the latest companies to arrive on the New York Stock Exchange, and unlike The Green Organic Dutchman, its sales have soared. Revenue more than doubled between the fourth quarter of 2018 and the first quarter of 2019, and the company has done a good job of acquiring property to grow capacity. Strong margins came under pressure in its most recent quarter, but CannTrust has historically done well to emphasize more profitable products to optimize its bottom-line performance.
• OrganiGram has the distinction of being the biggest grower of cannabis in the Canadian Maritimes, giving it geographical precedence in part of Canada's market over rivals located farther to the west. Revenue has soared recently, and OrganiGram saw positive results in pre-tax adjusted operating earnings -- a distinction that many of its larger colleagues have fallen short of achieving. Expansion plans are also proceeding apace at its key Moncton facility in New Brunswick.
• Aphria was also later to the game in appearing on U.S. stock exchanges than its more popular peers, but it has licenses to sell cannabis in all of Canada's provincial markets and has made a big push to bolster its international business. Some are nervous about a slow start in its home country following the legalization of recreational cannabis there, but massive expansion efforts should boost production substantially and make Aphria a major player in the market.
• Innovative Industrial Properties has followed a very different business model from most marijuana-related stocks, focusing on providing real estate opportunities to cannabis-producing clients seeking appropriate facilities that meet regulatory requirements. The real estate investment trust has done a good job of locating properties, finding tenants, and coming up with the financing needed to get deals done, and its dividend appeals to many cannabis investors.

Looking for a Pure Cannabis win

Many marijuana investors will keep watching the larger companies that dominate the headlines, hoping that they'll be able to sustain their past growth rates. Yet the strategy that Pure Cannabis is using seems to count on second-tier players ascending into the big leagues. If Ahrens is right, then the Pure Cannabis ETF could deliver market-beating performance and start taking away business from its more passive peers in the marijuana ETF space.