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ETF of the Moment: A Budding Comeback for Cannabis · Trillions

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
• 0:13
  Speaker 2: Welcome to Trains.
• 0:14
  Speaker 3: I'm Joel Webber and I'm Eric Valchunis.
• 0:18
  Speaker 1: We've been experimenting with some new things on Trillions. One
• 0:21
  Speaker 1: is a new episode that is three ETFs that are
• 0:25
  Speaker 1: new launches tickers to watch. This is going to be
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  Speaker 1: another ongoing new episode that we're going to do about
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  Speaker 1: an ETF of the moment. What's going to be uh,
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  Speaker 1: the one that we're talking about this episode.
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  Speaker 3: Yeah, just a little background on this. So we write
• 0:43
  Speaker 3: a note for BI that comes out every month that
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  Speaker 3: we look at one ETF that's sort of like, we
• 0:48
  Speaker 3: don't want to look at something that just performs so
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  Speaker 3: well over the past year or three years, but what's
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  Speaker 3: something that's like performing well in the recent month or
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  Speaker 3: two and has seeing more volume. So if it like
• 1:01
  Speaker 3: starts the scene way above average numbers in the short
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  Speaker 3: term relative to its averages, we want to highlight that
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  Speaker 3: because it's like a swell before it becomes a wave potentially,
• 1:10
  Speaker 3: and so we and also when you use these quantitative measures,
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  Speaker 3: you come up with ETFs that aren't obvious. You know,
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  Speaker 3: we're not picking the same ten that everybody knows. So
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  Speaker 3: this is a way to unearth some interesting like up
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  Speaker 3: and coming future star ETFs. And so we've done this,
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  Speaker 3: I don't know about ten times. It's good to do
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  Speaker 3: a podcast after because people again looking for tickers and
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  Speaker 3: investment ideas. The one we're going to focus on today
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  Speaker 3: is a ticker MSOs for people who don't know what it's.
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  Speaker 3: The Advisor Shares Pure US Cannabis ETF, which is one
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  Speaker 3: of many of them, but a sector that's been beat
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  Speaker 3: up really bad but just recently got some good news.
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  Speaker 3: And the ETFs for reflecting that and joining.
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  Speaker 1: Us is andre Yapp, who's then Bloomberg Intelligence ETF Research Associate.
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  Speaker 1: Welcome back to trillions, Andre, good to have you here,
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  Speaker 1: Thank you. Pleasure's mine.
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  Speaker 2: Okay, So why is this an ETF of the moment?
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  Speaker 4: So it kind of goes back to the criteria that
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  Speaker 4: we established earlier. Eric mentioned we are looking for an
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  Speaker 4: ETF that's having a moment in terms of its return,
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  Speaker 4: but not just that, but has increased trade in volume,
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  Speaker 4: and this ETF fits the bill. During the past month,
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  Speaker 4: it's up about forty four percent while it's trade twenty
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  Speaker 4: four forty four percent. And I'll get to why it's
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  Speaker 4: of forty four percent, while its tradeing volume is up
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  Speaker 4: about fifty six percent. So it's definitely halving a moment
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  Speaker 4: right now. Okay, the reason is happening a moment right
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  Speaker 4: now is because of the legislative landscape. Is it legislative
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  Speaker 4: or regulatory.
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  Speaker 2: Either way, it's fine.
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  Speaker 4: That language has changed. It's gotten a bit more accommodating
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  Speaker 4: to the cannabis industry. So what's happening is that the
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  Speaker 4: Department of Justice has moved marijuana from a scheduled one
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  Speaker 4: narcotic or drug to a scheduled three drug. What that
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  Speaker 4: means is that it's no longer subject to the most
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  Speaker 4: draconian or strict rules, and it's now subject to less
• 3:03
  Speaker 4: strict rules, but still within the confines of a regulatory structure.
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  Speaker 2: Yeah, so it's.
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  Speaker 4: Gone from being super oppressed we're watching you to be
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  Speaker 4: you're kind of okay.
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  Speaker 1: So that rescheduling good thing for cannabis and cannabis companies.
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  Speaker 1: What all does this thing hold?
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  Speaker 4: Well, it holds cannabis companies. But the thing with the
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  Speaker 4: ETS is that it can't hold these companies the stocks directly.
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  Speaker 4: It holds them through swaps.
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  Speaker 2: Can only look in the mirror to look at it.
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  Speaker 4: Yeah, essentially because cannabis is still an illegal drug, so
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  Speaker 4: it's not trying to hold it directly because of the
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  Speaker 4: implications that could have, so it holds it through swaps.
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  Speaker 4: Its hold large companies like cure Leaf, True Leaves, Green Thumb,
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  Speaker 4: and other companies that are in the space. But those
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  Speaker 4: are the three largest companies that it holds.
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  Speaker 1: What are holding swaps do for you, Eric, It's like
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  Speaker 1: I'm not holding the drugs in my pocket. They're over there,
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  Speaker 1: but not on my person.
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  Speaker 3: So MSOs, by the way, it sort of stands for
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  Speaker 3: Multi State Operators. That's the name for these US based
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  Speaker 3: pot companies that sell and distribute pot, and because it's
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  Speaker 3: federally illegal, nobody can actually own them. So what they
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  Speaker 3: do is they use a swap, so they own a swap,
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  Speaker 3: not the company. It's a clever workaround and this ETF
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  Speaker 3: really made that move. There's been a history of ETFs
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  Speaker 3: where it's better to ask for forgiveness than permission, and
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  Speaker 3: this was one of those cases where nobody could hold
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  Speaker 3: the US one. So all the pot ETFs were like
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  Speaker 3: heavy Canada, but this one was the first one to
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  Speaker 3: hold US via swaps, and it was a pretty instant
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  Speaker 3: hit people. Definitely one of that exposure. I mean, it's
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  Speaker 3: all got a billion. That's pretty good for a them METF.
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  Speaker 3: And what I find interesting about this one is it's
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  Speaker 3: still down eighty eight percent even with that forty something
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  Speaker 3: percent return. The past month just hammered. I like, I
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  Speaker 3: like when Andre's quantitative screen comes up with stuff that's
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  Speaker 3: been like in the doghouse for a long time. Uranium
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  Speaker 3: was like that, and I mean it was down ninety
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  Speaker 3: percent when those ETFs launched. And why you have you
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  Speaker 3: have a longer runway, you know, you don't need a
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  Speaker 3: lot to go out forty percent, Like that's how bad
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  Speaker 3: this thing's been beaten. Now. I will say there's been
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  Speaker 3: a couple other headfakes in the cannabis ETFs over the years.
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  Speaker 3: Usually it's on this regulation, the Psychedelic CTF PSIL, which
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  Speaker 3: holds not cannabis companies, But like you know, Kenemine, there's
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  Speaker 3: a big article in Bloomberg about that. So I think
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  Speaker 3: this whole landscape has been so beat up that any
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  Speaker 3: little bit of good news sends them soaring. And this
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  Speaker 3: is a great catch and one that we're going to watch.
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  Speaker 1: And why im Sauce and not the other cannabis ETFs.
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  Speaker 4: The reason mostly is because it's the only one with
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  Speaker 4: any sizeable assets. It's literally the only cannabis etf with
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  Speaker 4: all the over a billion dollars in assets.
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  Speaker 2: Everything else, everything else got smoked. It's chump change. See
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  Speaker 2: what I did there, had to do it once, great fun.
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  Speaker 2: I love it.
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  Speaker 4: So that's the reason why we chose it. A lot
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  Speaker 4: of the other cannabis ETFs fit the criteria, but in
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  Speaker 4: terms of stain power based on the assets, this is
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  Speaker 4: the one that we have to highlight. Everything else. There
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  Speaker 4: are two of them right now that have like less
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  Speaker 4: than forty billion, forty million dollars in assets, which is nothing.
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  Speaker 3: Yeah, I mean this is a great point. MJ was
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  Speaker 3: the original pot etf. That's another one that asked for
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  Speaker 3: forgiveness rather than permission because the SEC wasn't letting pot
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  Speaker 3: ETFs happen. This is a I don't know, six seven
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  Speaker 3: years ago and MJ was a Latin America real estate fund.
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  Speaker 3: So while all the other ones were waiting in line
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  Speaker 3: for SCA approval, let's just had a name and strategy change.
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  Speaker 3: It was like, oh, let's just be cannabis now. So
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  Speaker 3: it did a name change to skirt the line, and
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  Speaker 3: it worked, like the SEC just let it go anyway,
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  Speaker 3: MSOs came out and because it offers those US exposure
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  Speaker 3: and not just Canada, everybody started moving from MJ to MSOs.
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  Speaker 3: So it's not only the biggest, but for this particular
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  Speaker 3: issue where it's a US thing, this gets a ton
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  Speaker 3: of US exposure. So it's checks two boxes in my opinion, How.
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  Speaker 2: High do you think it can go.
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  Speaker 4: Again with the punds, I mean, it depends on how
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  Speaker 4: the investing public really look at the landscape. So what
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  Speaker 4: happened when it moved from schedule one to schedule three.
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  Speaker 4: It's not an outright legalization. Essentially, the whole optimistic outlook
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  Speaker 4: lies around taxes. So moving from one to three, it
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  Speaker 4: essentially can write off regular business expenses and not get
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  Speaker 4: tax on it. So it's paying taxes now like a
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  Speaker 4: regular company, whereas before it's paying taxes on gross profits.
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  Speaker 4: So essentially it was revenue cost of good soul pay
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  Speaker 4: your taxes on that. Now it's revenue cost of good sold.
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  Speaker 4: Deduct all your operating expenses, which is huge, and now
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  Speaker 4: you can pay taxes. That leaves these companies with tremendous value,
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  Speaker 4: tremendous cash in their pockets, which they can used to
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  Speaker 4: do other things. They can scale their business to other states,
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  Speaker 4: they could poss acquire other businesses that are smaller and
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  Speaker 4: not necessarily doing so well. So it gives them a runway,
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  Speaker 4: so to speak. But at the same time, we have
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  Speaker 4: to recognize that what it does is it gives it
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  Speaker 4: medical uses. And medical uses is about twenty five percent
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  Speaker 4: of these companies' market share, I guess, But the other
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  Speaker 4: seventy five percent it lies in recreational adult use.
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  Speaker 2: So these states where it's been legalized exactly, that.
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  Speaker 4: Is the portion that I think investors would really leap
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  Speaker 4: at if that becomes unlocked, because that right now, that's
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  Speaker 4: the ceiling that these companies are essentially facing, and that
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  Speaker 4: ETF essentially incouncerts as well.
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  Speaker 1: Okay, so there is a modest footnote for the tax
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  Speaker 1: set up that you're describing.
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  Speaker 2: Now, what is the footnote?
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  Speaker 4: Yeah, So in the rescheduling, what it does is it
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  Speaker 4: gives provisions for medical marijuana. So businesses with a portfolio
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  Speaker 4: that encompasses both medical and recreational use, that tax benefit
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  Speaker 4: only applies to the medical side. The recreational side still
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  Speaker 4: has to adhere to the old regime where it pays
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  Speaker 4: taxes on gross profits, so it's not able to duct
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  Speaker 4: regular business expenses. However, the medical side that will be
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  Speaker 4: able to do that. So there's a new dynamic, so
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  Speaker 4: to speak, for these companies where they have to kind
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  Speaker 4: of total line and separate their business.
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  Speaker 2: And most didn't have both.
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  Speaker 1: Yes, So what you're kind of describing here is an
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  Speaker 1: industry that's been basically put in paralysis and then all
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  Speaker 1: of a sudden like sort of coming out of that.
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  Speaker 1: It's like that that MJ moment that we were talking
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  Speaker 1: about years ago never came. But now that they've been rescheduling,
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  Speaker 1: we're in a whole new dynamic somewhat.
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  Speaker 4: So it's like you've been shackled really tightly in the
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  Speaker 4: handcuffs and been loosened a little bit. I wouldn't really
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  Speaker 4: call it liberalization, but your arms aren't being chafed anymore.
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  Speaker 3: Absolutely, I mean, this is evol to ETF. It should
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  Speaker 3: be treated with care. Most people who would add this
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  Speaker 3: to a portfolio are going to add it in a
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  Speaker 3: like a one percent allocation. Again, in that sort of
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  Speaker 3: ten to fifteen percent hot sauce bucket. I think it
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  Speaker 3: would fit fine there if you're bullish on the industry.
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  Speaker 3: I know, Joel, I'm a big like Peter Lynch guy,
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  Speaker 3: like to walk around and see stuff, and I don't
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  Speaker 3: think a day goes by where I'll smell marijuana on
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  Speaker 3: the street, whether I'm in New York or Philly. Like
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  Speaker 3: it's pretty much accepted as a no big deal anymore.
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  Speaker 3: The question is like how many people will recreationally use it,
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  Speaker 3: because there are definitely there's some pushback that like, okay, fine,
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  Speaker 3: it's legal, but like I've definitely seen on social media
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  Speaker 3: people like this really like kills your whole ambition and
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  Speaker 3: like almost like the things that like Nancy Reagan used
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  Speaker 3: to talk about are like coming out naturally from people.
• 10:39
  Speaker 3: It's like, yeah, it's legal, but like do you really
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  Speaker 3: want to like make yourself lazy? I also think there
• 10:44
  Speaker 3: are some reasons to use it to like help kill
• 10:47
  Speaker 3: pain that aren't painkillers, and that's a whole big thing.
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  Speaker 3: So I could, you know, I think you have to
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  Speaker 3: really I would rush up on the industry and make
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  Speaker 3: sure you're bullish, but there is a I mean again,
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  Speaker 3: things that are beaten up. I've been around long enough
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  Speaker 3: that I've seen it where it doesn't take a lot.
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  Speaker 3: MSOs also has a leverage version. I mean, if you
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  Speaker 3: really want some like Kalipino like Ghost Pepper, msox is
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  Speaker 3: two x MSOs. So if it's a short term bet
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  Speaker 3: that that would you know, go into jackpot mode if
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  Speaker 3: you had a good news on the regulatory front and
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  Speaker 3: the other thing is on regulatory I think everybody thought
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  Speaker 3: it was the Democrats who were going to like make
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  Speaker 3: this okay. So the fact that it's a Republican president,
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  Speaker 3: I think that's probably also a pretty good sign that
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  Speaker 3: like both parties seem to be like comfortable with this.
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  Speaker 1: Bloomberg Intelligence has a traffic light system to evaluate sort
• 11:39
  Speaker 1: of what the holdings of an ETF are. I'm curious
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  Speaker 1: how something like a swap would mesh with that green
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  Speaker 1: light system. How do you guys evaluate it?
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  Speaker 3: Yeah, this would get yellow for two dings, uses derivatives
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  Speaker 3: and also the fact that it's active. You know. So,
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  Speaker 3: but that's it's pretty vanilla. It's probably i would say,
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  Speaker 3: the equivalent to like a PG thirteen movie, but that
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  Speaker 3: leans heavy in violence or something, okay, or maybe drug use.
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  Speaker 2: In this case, Gummy's all Right, there we go.
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  Speaker 3: No, no, this this ETF is like the movie Dazed
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  Speaker 3: and Confused.
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  Speaker 2: Okay, you know what I mean.
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  Speaker 3: All Right, there you go.
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  Speaker 1: A classic. All right, andre Yamp, thanks for joining us
• 12:19
  Speaker 1: in Trillions.
• 12:19
  Speaker 4: Thank you for having me.
• 12:27
  Speaker 1: Thanks for listening to Trillions until next time. You can
• 12:30
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• 12:41
  Speaker 1: produced by Magnus Hendrickson and Kishev Pontia. Bye.