Over the next decade, marijuana is on track to be one of the fastest growing industries. Although estimates vary wildly, worldwide sales could tally anywhere from $50 billion to $200 billion by the time 2030 rolls around. For context, global weed sales tallied just shy of $11 billion in 2018. It's this rapid growth of an already popular industry that has investors piling into pot stocks.
However, the cannabis industry isn't immune to that which plagues all next-big-thing investments. I'm talking about growing pains. To our north, regulatory issues have constrained supply and created huge bottlenecks. Meanwhile, in the U.S., high tax rates on legal product have made it difficult for licensed producers to compete with black-market growers on price.
Behold, the genius new way to invest in marijuana stocks
There will obviously be winners in the cannabis space, but (pardon the pun) weeding them out in the early going hasn't been easy. That's what makes what I'm about to tell you so exciting: There's a smart new way to invest in cannabis stocks.
Earlier this week, AdvisorShares debuted a brand-new exchange-traded fund (ETF) focused on cannabis... but with a twist. Instead of following in the footsteps of existing ETFs and purchasing a hodgepodge of North American marijuana assets, biotech, and perhaps tobacco companies, the newly listed AdvisorShares Pure U.S. Cannabis ETF (NYSEMKT: MSOS) is solely focused on U.S.-based marijuana and ancillary pot stocks.
Why's this such a big deal? To begin with, the United States is a considerably larger peak sales opportunity than Canada. For instance, licensed cannabis-store sales in Canada hit an all-time high of $153.7 million in June 2020. Extrapolated out a full year and assuming some modest sales growth as new dispensaries open, Canada could be generating perhaps $2 billion to $2.3 billion in annual pot sales.
Comparatively, California does more than that in a year all by itself. By 2024, an estimated 13 states, led by California, should be generating at least $1 billion in combined medical and recreational annual sales. Investors tend to follow the money, and right now, that money is absolutely leading to the United States.
Additionally, there are fewer supply constraints in the U.S. market. Whereas federal and provincial Canadian regulators have mismanaged the rollout of various products and dispensaries, most legalized states have done a pretty good job of ensuring that there's an adequate presence of dispensaries and a reasonable system in place to get marijuana from grower to retailer. Though supply bottlenecks do exist in the U.S., they're nowhere near as crippling as they've been to Canadian licensed producers.
Here's what you'll find in the AdvisorShares Pure U.S. Cannabis ETF
What, exactly, are investors getting themselves into if they choose to buy the AdvisorShares Pure U.S. Cannabis ETF? To cover the housekeeping aspects, you can expect a net expense ratio of 0.74%, which is pretty much on par with other weed ETFs and reflective of a fund that'll be actively managed.
But what you really want to know is what this fund is holding.
According to the breakdown, close to 55% of all assets are in microcap and small-cap stocks, which means you can expect plenty of volatility, even in a diversified ETF. Investors can also expect a wide gamut of industry representation. Even though nearly 56% of all assets are tied up in multistate operators (MSO), the AdvisorShares ETF adds close to 11% in pot-focused real estate investment trusts (REITs), close to 8% focused on cannabidiol (CBD) companies, and almost 7% devoted to cannabinoid-based biotechnology.
Following its debut, the AdvisorShares Pure U.S. Cannabis ETF held 24 stocks, 18 of which had weightings of between 2% and 5%. However, four stand out as being head-and-shoulders above their peers in weighting (between 8.2% and 8.3% each):
- Curaleaf Holdings (OTC:CURLF)
- Trulieve Cannabis (OTC:TCNNF)
- Innovative Industrial Properties (NYSE:IIPR)
- Green Thumb Industries (OTC:GTBIF)
This is one heck of a foursome. Curaleaf and Green Thumb are on pace to be the first and second North American pot stocks to hit $1 billion in annual sales, with Trulieve Cannabis potentially able to do so by 2023 or 2024, depending on its expansion plans.
These are also some of the fastest-growing or most profitable cannabis stocks in the world. Marijuana REIT Innovative Industrial Properties is the most profitable pot stock on a per-share basis, whereas Trulieve Cannabis is the most profitable MSO in nominal terms. Last year, Trulieve generated $252.8 million in sales (almost exclusively from Florida) and reported $86.6 million in operating income, before factoring in fair-value adjustments and one-time benefits.
Curaleaf, Trulieve, and Green Thumb also have 90, 59, and 48 respective operational dispensaries in legal states.
Is this ETF right for you?
Now that I've covered all the exciting aspects of this brand-new cannabis ETF, let's also cover a few not-so-great things.
First, as noted earlier, most pot stocks are microcaps or small caps, and the vast majority of them are listed on the over-the-counter (OTC) exchange. Since marijuana is a federally illicit substance, businesses that come into direct contact with cannabis aren't allowed to list their shares on either the Nasdaq stock exchange or New York Stock Exchange. Suffice it to say, OTC stocks can have low volume days that heighten volatility.
It should also be understood that even though U.S. marijuana stocks are currently running circles around their Canadian counterparts, this is still an industry that's green behind the ears (yes, another bad pun), where regulators and management teams are learning on the fly. There are going to be mistakes made, and emotional short-term investors are liable to have quite a bit of influence in the years to come. This is a roundabout way of saying that investing in marijuana stocks is a long-term commitment and not a get-rich-quick scheme.
Third, I'd point to the net expense ratio of 0.74%. Again, this is perfectly in line with other marijuana ETFs that investors can buy. But if you follow the cannabis industry or know what you're doing, it can be viewed as a steep price to pay for diversification.
Is the AdvisorShares Pure U.S. Cannabis ETF right for you? While that's a decision you'll have to make, I personally favor this ETF over all others.