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Managers Explain Their Cannabis ETFs: THCX

September 29, 2020 3:55 pm
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By Natan Ponieman and Javier Hasse.

In this four-part series, Benzinga takes an exclusive look at some of the highest valued, US-traded cannabis ETFs.

For part two, we spoke with Matt Markiewicz, executive director of The Cannabis ETF (NYSE:THCX).

For part one, we examined the ETFMG Alternative Harvest ETF (NYSE:MJ).

The Cannabis ETF was launched in July 2019. This passive fund follows the Innovation Labs Cannabis Index, a portfolio of global stocks that have a business interest in the legal marijuana; hemp; and CBD-based pharmaceutical, consumer and wellness markets.

Markiewicz served as director of iShares, BlackRock’s ETF division, for six years before launching the fund.

BZ Cannabis: What's the fund criteria for putting together the index?

M.M.: In order for a stock to be eligible for initial inclusion in the index, it must trade on the NYSE, Nasdaq, TSX, TSX Venture or Australian Stock Exchange. Operate a legal business in the jurisdiction where it’s based. Recreational cannabis in Canada is legal, but it’s not in the U.S. Therefore, if a company grows or distributes marijuana in the U.S., it cannot be included in the portfolio at this time. Have a $100 million market cap. The maximum weight of a stock at the time of rebalance cannot exceed 8% of the portfolio.

Related: Cannabis ETFs: Safe Harbor for Investors of all Types?

What's the strategy? How is this a better approach than the one taken by other cannabis ETFs?

The fund is a pure play portfolio. It does NOT own any alcohol or tobacco (T&A) stocks, unlike many of its peers which do. For example, The MJ ETF (NYSE:MJ) is 25% tobacco.

T&A stocks are defensive while cannabis is a growth theme. Defensive stocks should not be part of a growth portfolio. On a recreational basis, T&A are losing market share to cannabis. As a result, T&A companies are making investments in cannabis companies. As an investor, we’d rather own stocks that are the “acquirees” versus the ones that are the "acquirors." In our view, more value is created this way.

THCX rebalances monthly (in accordance with the index). The other two passively managed peer ETFs rebalance quarterly. As cannabis stocks are some of the most volatile on the planet, this approach helps to smooth out the volatility of the portfolio. Many traditional  — or some may say “stodgy” — indexes rebalance quarterly, semi-annually or sometimes yearly. Cannabis is a growth industry that is rapidly evolving. The monthly rebalance allows for more flexibility in adding/deleting stocks.

Why are ETFs a good investment option for retail investors with little knowledge of the cannabis market?

ETFs are a good investment option for retail investors in general but are especially appropriate for investors interested in getting exposure to cannabis for several reasons:

  • Diversity: THCX’s portfolio owns 30 stocks that span various sub-themes of the cannabis industry. Many investors tend to buy the bigger, more liquid stocks which are the growers. What we always preach is that the cannabis industry is just more than a “seed to sale story”. We believe that investors should have some exposure to all of the sub-themes for cannabis which include: cultivation, retail, ancillary, testing, medicine, CBD and extraction. The other benefit of diversity is that you’re not putting all of your eggs in one basket by buying a couple of stocks, so in essence it's a way to lower risk.
  • Liquidity: Remember that an ETF is just a wrapper for a portfolio. The liquidity of that wrapper is based on the what’s in the portfolio. With a basket of stocks that trade US$700/mm a day on average, THCX offers ample liquidity for investors big and small.
  • Income: Most investors are surprised that THCX actually pays a dividend which is not common for a growth-oriented fund. As many cannabis companies are still at a pre-profit level, there is no expectation for them to pay a dividend in the near future. However the fund pays a dividend (almost US$0.67/per share thus far in 2020) from revenue generated from lending securities in the portfolio.

How can experienced investors benefit?

For more experienced investors, an ETF also makes sense. Experienced investors can also benefit from the 3 attributes above (diversity = an attempt to lower risk), liquidity (often more important for experienced investors who like to keep transaction costs lower), and income (what investor wouldn’t want a little yield on their portfolio?).

Ability to go “short” cannabis with an ETF: If an investor has a view that cannabis stocks as a group are going down, they may wish to short the cannabis market. Shorting ETFs makes a lot of sense because you are not taking idiosyncratic risk on one particular company. Let’s say for example that you are short a particular cannabis stock and it gets acquired, there’s a good chance you will lose money on that short as you’d expect the price of the stock to go up. Also, the cost to short or “borrow” single cannabis stocks can be quite expensive. Because THCX is composed of 30 companies, historically there is a lower blended borrow rate on the ETF.

Lead image by Ilona Szentivanyi. Copyright: Benzinga.

Español: Gerentes Explican sus ETF de Cannabis: MJ

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