AdvisorShares Ahrens on Cannabis Investing

three hundred unique equities map to it. One of the themes that we have is called novelneral Mental Health, and as you say, we just wrote a piece about it, interestingly enough a couple of weeks ago, because we've seen a really decent pop in that theme off the back of this expected rate reversal that could be on the

rise of horizon here in the US. So as some background on that theme, the real premise behind it is that we really need to start tracking within the innovative health space, particularly companies that are pursuing more interesting therapeutics as well as deep brain stimulations. One of the theme exposures within that theme itself is actually cannabinoids and side of the sibon. So what's been great about that is again we're seeing it go a little bit more mainstream.

This theme itself is very focused on non OTC so pharma grade kind of ainoids in sila sibon. We have names in there such as Jazz Pharmaceuticals for instance, which is always a big name when we talk about this topic. And it's been really interesting to follow because it was it was, you know, a pretty rough couple of years

for that theme. Naturally, the risk off tolerance within the US not particularly good for biotech and small cap stocks, but we've seen a lot of that come back, and in twenty twenty four, actually we've got a decent return year to date on the theme as a whole, but just as a little bit of a flag here cannaboids and sib sil of SIBN theme exposure within that theme, it's been a return about thirty one percent, so it's definitely been a big mover in twenty twenty four, and

we think that points again to the fact that we're seeing some of this risk off tolerance reverse and we expect that this dark we're going a little bit of a dark horse theme here that in the back of twenty twenty four we could see it get an increased amount of attention, especially off the if we do get some of those great reversals. That being said, you know, it's been a little bit choppy week, so I'm going to couch everything I say with the fact that you

never know, and choppiness could persist. But even in the last week, we've actually seen those US small caps actually do quite well, and particularly in this novel neuro mental theme. They've held up with decent resilience amongst you know, what has been some global turmoil. The other way that we're actually tracking cannabis though as well, is we also pay very close attention we write content around and we also have a dashboard that tracks the metfs, so global the

metfs we track over nine hundred and seventy global theme metfs. Naturally, cannabis and psychedelics is one of those themes that we track, uh, you know, getting right to the bottom line here, Advisor shares pure cannabis theme, which you know we do have Dan here with us today is one of those themes in there. It's actually the one that has the highest AUM within that cannabis theme. It has been another you know, it's been another twenty twenty four good story for that theme.

So against really broad pullback inflows within our whole thematic data set, like we're over six billion dollars in outflow actually net outflow for theme ETFs as a whole, Cannabis and psychedelics have net inflow, so they're fifth highest for net inflow. And when you think of the fact that only ten of our thirty five themes within that data set have net outflow showing some net inflow in twenty

twenty four. I absolutely mean something. So needless to say, I'm excited to be here today to talk about these themes and all the action that we're seeing, because naturally we have a lot of stuff happening in the regulatory environment that has direct impact on cannabis and cambinoids and tylo sibon and all these types of things, So I'm excited to talk about it.

gaming and weapons and so on. I managed that fund for its first three years and left there with a It bounced between four and five star rated and it was in the Lipper top one, two, three percent depending on your time frames you're looking at. So successful fund. But eventually that led me to Advisor Shares. When Advisor Shares was just getting off the ground, our CEO, Noah Hammond, had secured one of the very first exemptive reliefs for active ETFs. Key knew me for being able to wear

multiple hats in the investment space. I knew how to open funds, close funds, merge funds, and in the back of our minds we always thought we might do something in the vice or related space, and here we are.

called it the Recession Proof Portfolio. And the idea for vice came out of the tech bubble, way back when a lot of general indices and sectors fell off a cliff, and we were studying different industries and different sectors, and we suddenly noticed, hey, alcohol, tobacco, those things that consumers are going to indulge in no matter what the economy is doing, no matter what stock market's doing, they held up real well. And thus we created that fund. But

I will say it's evolved now at Advisor Shares. I'm going to lead us into our subject for today, which is the cam A CTF. We were starting to get contacted by people who thought they wanted to launch a cannabis related ETF, and we studied it and said, no,

that's not going to work. There's not enough to invest in there's not enough large listed stocks that are liquid to invest in, and we told people no, but that real quickly evolved, much like other vice industries, if you even want to call it vice industry, because I strongly

believe cannabis is a medicine. As things evolved at Advisor Shares, we decided to create an ETF, and then we had to negotiate with our custody bank and the exchanges and everybody else because we wanted to put the word cannabis

in the perspectus. So what I'm getting to here is we launched Advisor Shares Vice ETF ticker symbols actually Vice, VI, ic E, and we put the word cannabis initially in the perspectus because we were going to invest in alcohol companies, UH, tobacco companies, other companies that were ancillary listed stocks to cannabis without actually plant touching cannabis. That was our first

step into you know, vice related slash cannabis related. And I'm using all these key words here because when you put the word cannabis in a perspectus, it sets off all kinds of bells with the regulators and the custody banks and even the exchange so we launched this cannabis slash related ETF because frankly, a lot of alcol and tobacco companies and other companies were starting to dabble in cannabis.

But I'm glad we had the discussions with our custody bank, who was a very good partner of mars At Bank New York Melon, and we were able to then talk about again. As the cannabis space evolved and more companies were becoming listed, we launched Advisor Shares Pure Cannabis ETF ticker symbol YOLO. At that time, it still wasn't possible to do an investment in pure US cannabis. We did not think people have heard of companies like till Rey and Aurora and Canopy. Those are frankly, you know, Canadian

based companies. But if they kept their THHC products on the north side of the border, they were allowed to list on the New York Stock Exchange and or Nasdaq and they got flooded with some institutional investment also sorts of things. That's back when you know, Canada legalized. I'm slowly getting to the fact that we launched our US fund here. When we did that first fund Yolo. We knew that we wanted US exposure. We thought the real

long term growth story was in US cannabis. So we sat down with Bank of New York Melon and we gave them a what if. What if instead of custodying these stocks that are trade at OTC in the United States because they can't yet list in the United States, what if we serviced the fund with you Bank of New York Melon. But we wanted to use a total

return swap. We want to use a total return swap to get access to a US cannabis company that the bank frankly is not willing to allow us to trade in and custody because they have non permissible lists of cannabis. And they said, you know that'll work. We're very happy to service. You can take care of that. It's done with tri party agreements. It's all you know, collateral movements, all sorts of things that are handled by the bank

without the bank actually custodying stock. So this was an idea that we did with our fund, Yolo, which was the first actively managed cannabis company approved by the SEC in the United States. They asked us to go out and get a third party legal opinion on it, which we paid for and did. We kind of were groundbreaking in that space, and we became the first ETF company to have a cannabis fund. With that third party legal opinion,

the SEC requested utilizing total return swaps. We're the first one to kind of invent that structure as a way to invest in cannabis in the United States. And I'm still talking about our fund yolo here. So US cannabis was expanding rapidly, and we filed for with the SEC our fund that has become MSOs or you can call it MSOs, which is Advisor Shares Pure US Cannabis ETF. Well, not a lot of people know that that fund was

in registration for a full year. It took that long the SECS is to get another legal opinion addressing cannabis investing, addressing the use of total return swaps. We got that, and then we had to go to the New York Stock Exchange and say, hey, we not only want to have the current allowed limits of use of total return swap, we want a much higher use of total return swap.

And the New York Stock Exchange, very good partners as well their attorneys, took the ball and ran with it and worked very hard on a on a nineteen before rule filing, and not a lot of people know what those are, but it is a rule filing to go above and beyond the current listing standards for ETFs. And you know, they were again a great partner. They worked very hard on that, and we got that rule filing that allowed us to use more total return swaps than

people would used before enliced ETFs. We got the Bank of New York Mellon on board, we got you know, the SEC was satisfied with our legal opinions. So after a full year, we were able to launch our advisor Shares Us Pure Us Cannabis ETF ticker symbol MSOs MSOs, and it's been a success since then, as long as we're not talking about federal regulation promises made by a lot of pump politicians, the fact that it's taken so

darn long, everything else. But I wanted to get through the story of how that fund came to be because it's been a piece of work.

message out and helping people understand. And even though our fund has now been around for over three years, I'll say investing in the States is still in its infancy because when you talk to you, your average advisor, your average investor that's really not living in the cannabis bubble

that I live in. Most people don't know the difference, or they still drop names like you know, Canopy and Aurora until Ray and they think that's cannabis investing, or they hear bits and pieces that have been on the news about oh, there's a proposal for safe banking, Oh there's a proposal for the for the Safe Act, there's you know, the More Act. There's been all these different

proposals that have been floated. You know, back when Biden first got in office, they were talking about decriminalization, legalization. The Democrats got control of the Senate briefly sort of, and then the runoff elections and everybody thought cannabis was going to go through the roof, And now here we

are four years later. What has happened, though, is enough investors have gotten the message, understand the opportunity, and even though it's taken a very long time to answer your question, there's a large group of investors that know the real opportunity is in US cannabis, not in Canadian cannabis. There's a difference between the Canadian companies in legalization and potential US legalization and the state by state approvals that we've had so far in the US. And a very interesting

thing about our fund. In all the years I've been in this business, I have never seen a fund that has had as sticky of assets. And what that means is usually in an industry or a sector or an individual fund, when performance is down, assets flow out. Not only does your AUM go down because performance has driven down but investors have other options. They rotate other industries, they rotate to other sectors, and money flies out the door.

But very it's very easy to say performance of the overall industry and our fund has been really disappointing, very frustrating. As we've been waiting on us that'll reform again we were promised four years ago, and the assets of the fund have only continued to well, they've been sticky and it's continued to see net inflows of capital in spite of the performance. And that makes us see there's a there's a big group of investors here that are very committed.

They are very let's call them diamond hands if we want. Those investors are sicking with it. The fund also has it has options. It has a sister fund that is a approximately two x version of the fund M SOS that adds to the overall assets and the overall because one fund and invests indirectly in the other fund through

counterparties using total return swaps. Again, but the options and the two x fund, I have to mention those things because that leads to a good deal of market makers, market participants that are also holding the fund to hedge all those positions and to cover the options exposure. So

it's a very unique story. The fund has been over a billion in assets, even though you know performance is up and down, it's still well over eight hundred and fifty million dollar fund is so right now that the next largest fund might have two hundred.

David debated topic. Actually, I will say between me and my friends about why it wasn't I'm interested to hear your perspective on why Canada's path isn't necessarily what we should expect to see from the US responsor.

little bit of exposure in Europe and in Israel. But a lot of people are very familiar with the Canadians. So Canada legalized a number of years ago, and when they first had the announcements about legalization, those stocks spiked. They went straight to the roof, even though they weren't even didn't have sales yet, so they traded like meme stocks, and then legalization happened. Well, also these Canadian companies were allowed to list on the New York Stock Exchange and

or more on NASDAC. A lot of them are cross listed on the Toronto TSX as well, and they got capital that goes along with those listings and the opportunity. And they built a lot of greenhouses, they grew a lot of weed, and the provincial rollouts in Canada were lousy. They didn't have enough brick and mortar stores in the most populous Ontario. People couldn't didn't have the stores to buy it. They overgrew, they overbuilt, they didn't have the sales to back it up, and they burned through a

ton of capital. Is it a failure, No, it's not a failure. There's still plenty of companies that will survive. And they had some inroads into the European markets as well that are now growing. So our fin YOLO invests in companies like Tilray, in sn d L, in Organic gram and Canopy even. But yeah, it's been a very different market than what we have in the US. And I'll go ahead and I'll tell you about the differences

in the US. The US, these companies for the most part were forced to list on secondary exchanges in Canada, such as the c S or the NEO that's now called the CBO. They couldn't list on NASDAK and n y S because these companies are still federally illegal technically, even as we see state by state continued growth and it's still happening. Just this past week, they turned on adult use sales in Ohio, a huge state that how I had a successful medical program. Now they have a

don't use in Alaia. I'm seeing that all over the US. So these companies did not get flooded with capital. They can't really get institutional investment. They mostly have individual investors, retail investors, some family offices and hedge funds and you know some some owners and founders. And these companies were forced to be quite frugal. That's the best explanation I can give. And if you look under the hood, we don't see huge executive pay we see solid balance sheets,

we see frugal operations. And look where they are now. We have multi billion dollar companies operating in the US. They still don't have it institutional capital, they still don't have the exchange listings, but they're actually multi billion dollar market cap companies operate rating in dozens and dozens of states, and they have beautiful balance sheets and beautiful p and ls. For in many cases, if we're looking at, you know, the top companies, a lot of people refer to as

tier ones. So it's really been an interesting story of these companies that were forced to have sound frugal growth vosus companies that in many cases overbuilt, overgrew, didn't have the sales to back it up and had to regroup multiple times. That's a difference.

traditional tools. What I like to use personally Inherent Advisor shares is we look at earnings revisions and outside analyst ratings, and there are some very unique tools for looking at high rated, accurate analysts. Because I also think there's a lot of analyst ratings out there that are garbage and are biased certain industries and certain stocks. Analysts that are

scored for being very accurate. We pay attention to those and not the others, and we like upwards analyst earnings revisions intra quarter that can lead to looking at earnings beats on the horizon. So I also like managing vice and restaurants and hotels because it is a there's pros and cons. It's a limited universe of stocks, So I'm not saying this is just a large cap growth fund and I have thousands of stocks to screen through. I have a limited universe, and I'm just trying to find

which are the best in those particular areas. Which leads me to another comment here about active management. You guys know from the name of this podcast that active can mean a lot of different things. In my mind, and most people should understand active simply means it's not an index that's the only active really means. Besides that, there's funds that are very active, very tactical, and there's funds that are simply not so active, but they're not following

tied to an index. You have some human or group of humans or model that's saying we want to overweight these docks, underweight those docks. You know, here's something we want to avoid. You have some something happening there, whatever it is, that's not an index. And I will say in cannabis, I think active can be a whole lot better than an index, because sometimes some of the biggest companies are ones that you absolutely want to avoid and

might not be the very best. In this US cannabisy tf MSOs, we have a very limited universe of stocks and the biggest, the tier ones are the ones we want to invest in. But our fund does not follow an index. We have it very purposely heavily overweighted in the top five holdings. The fund has an absolute ton in the top five holdings, and that's very purposeful. And we have some very small investments in smaller companies that don't have a lot of material weight on the portfolio

but could be a nice call option. If they have more torque, we'd call it. If there's some smallest companies have more torque double or triple or quadruple or be ten baggers, you know, that's great. The fund has a very heavy weight in the top five hold top five holdings, top ten holdings, and we are very purposely inactive. I don't want to be hitting the bid on any of

those top holdings. These things are OTC traded in the US, listed on secondary exchanges for the most part in Canada until we get our federal reforms that we're going to come back and talk about, I think I don't want to hit the bid. So this fund is very inactive. I don't use analyst ratings and outside tools. We get a lot of information from analysts that we know and trust, and a lot of communication. I talk to the companies themselves. I have good access to their CEOs and chairmen, a

lot of communication. It's a pretty unique cannabis bubble that we all communicate in, and I know which companies we want to have heavy weightings in. So I think that was a really long answer to answer your question. But I managed this cannabis ETF a lot different that I manage those other funds. Cannabis is done through knowing these companies and the people there very well and having a lot of communication, heavy heavy bets on the top companies.

sell their own product. That's called vertical vertically integrated, and not much of what's called ancillary companies here that sometimes can list on the major exchanges, but they're not really growing or selling product.

been very focused on plant touching. I'd be interested in hearing your kind of view on those other types of industries that are related to cannabis and why you have steered clear of them versus what doors you're leaving open or looking at more.

in you know, vape manufacturing things like this. So there's a lot of ancillary products and support types of companies cannabis, and those companies were somewhat in our fund MSOs if they were really US focused. But over time, I although it's been a painful three or four years, I think we're getting closer and closer to the goal line of US federal reform and we'll come back and talk about

it in a minute. But we just came out of the public comment period for the DEA to hopefully reschedule cannabis off of Schedule one like narcotics and down to Schedule three, and we think it's going to be a huge step for cannabis. But I digress. As we're getting

closer to that goal line. In the last year or two, we have moved out of those ancillary companies, out of the support companies in MSOs because we really wanted the pure multi state operator growing packaging, selling actual cannabis products in the US. We wanted not only the MSO is fun to be pure US, we wanted to be pure actual cannabis touching companies because we think that's where the upside is.

and regulatory burden actually present as a drag. So love to hear your views.

last three or four years. You know, something called safe banking was approved in the House multiple times but never came to a real vote in the Senate, and people were angry about that. And that was just the safe Banking bill for cannabis. There's been the More Act. There's been a whole slew of different proposals and we really

haven't seen it. But credit to the Biden administration for doing some things right about cannabis is they formally asked last fall for the HHS to review cannabis for potential rescheduling. They did that, and then under open records the actual two hundred and fifty two page document came to light that has lots of medical references, actual medical use for cannabinoids, and that alone should be the proof that it should

not be on DEA Schedule one. DEA Schedule one is for drugs like carolin that have no medical valid use. If you have no medical use, your own schedule one. If you have medical uses, you're not supposed to be on Schedule one. So then there was a long public comment period. It's ninety five percent plus positive. There's more than forty thousand public comments. This just came out in the last couple of weeks. So I am ninety nine point nine percent sure that this rescheduling is going to happen.

And the problem is investors have been hearing noise for the last four years. Your average investor does not live in the cannabis bubble that I live in, and your average investor just says, oh, yeah, cannabis whatever. No I've been hearing this for the last four years, don't I don't believe it. And the other part is there's plenty of investors that, even if they believe this rescheduling is coming, but we can't say exactly when it's coming, can't invest

in cannabis in the US. And that's something I haven't talked about yet. There are the companies that I invest in Green Thumb Industries purely, truly Vano. These are all you know, tho are the top four holks of the fund. They're on non permissible lists at almost all major banks and wirehouses. And you know, we all know that most of the big wirehouse broker dealers are owned by federal banks, Stanley and b of A, Merrill and UBS and everybody else.

They can't invest in those stocks at all. There's a whole number of brokerages that can. People can invest in our fund MSOs. It's fully available through all the Bank of New York pershing platforms. It's available at Fidelity, Schwab. Lots of places can invest in the fund, which also helps our fund have you know, well over eight hundred million in assets and very sticky assets. But our fund's not even available officially at b of A Merrill or

Morgan Stanley or EBS. I think maybe some very top producers and top hedge funds and so on can actually hold it because we see the assets at some of those places, but retail can't buy it, your average advisors can't sell it, so on. So there's a whole lot of money on the sidelines supposedly that again, even if they wanted to invest in this stuff, they can't. There's other investors because of what we've been through the last

four years, that are like they're in the show me stage. No, I'm interested in that, but I'm not going to touch it until it's real, until I really see that the government is really going to reschedule this, is really going to approve it, and we'll go from there. Now, I'm of the opinion that again that rescheduling is coming, and I think it's coming sooner rather than later, because I think the the Democratic side is going to uh when they have the DNC in a couple of weeks, I

think they're going to talk about cannabis. I think it's going to be a campaign point and there's going to be discussion and they're going to move it to attempting to finalize that rule possibly this fall. Now, what does schedule three mean. Technically, Schedule three means that it's a prescription drug. Okay, there's pros and cons of this. We have a multi billion dollar industry in the United States

that medical marijuana is in forty something states. Now adult use or a lot of people will call it wreck is in close to thirty states. Now it keeps changing so rapidly. I don't even keep track. I used to keep close track on it. I keep track of the big states like Ohio turning into adult ease this week. So that's not to be derailed. What this means is when we get Schedule three and they actually put it into a formal rule and so on, we are going

to be required to amend AML and Finsen. We're going to have to have guidance from the DOJ or the Attorney General. A lot of people in my industry have been talking about the Garland Memo. Supposedly what we have called the Garland Memo is sitting in a drawer and already drafted, waiting for this rule to be final Supposedly, that's what rumors say. So there's going to have to be guidance from the DOJ, no if ans or butts on this that allow the medical markets to exist in

states where they already allow. You know, we're not going to have medical doctors writing prescriptions for cannabis. They're going to allow state by state to have their rules for how they do their medical programs, and different states have

more strict and more loose medical programs. On top of that, again, there's a huge number of states doing adult use wreck So we're going to have some type of safe harbor, some types of ruling from the Attorney General and the DOJ that allow for states rights and say that those states are not contrary to federal law. So here's where we're talking about opinions again. I'm of the opinion that when that all happens, it's going to indirectly lead to

banking and listing on major exchanges. I have to say indirect because now on Schedule three happens, it doesn't change anything for banking, it doesn't change anything for listing on major exchanges yet. But I think the snowball effect of finsen AML, a letter from the Attorney General, guidance from the DOJ, it's going to put those the things in progress in motion that lead to banking and federal law. The other thing is there's been called the Safe Act

and the Safer Act. It's been you know, it's been through the Senate Banking Committee, even it just didn't go to the Senate floor. I think those congressional bills are going to become much less controversial. They're going to become much less of a political football like they have been the last four years. That once we have this rescheduling in place, maybe finally the House and Senate can do their damn jobs and actually pass some cannabis reforms after

this rescheduling all gets really done. So that was a little bit of a tirade. But I talk a lot.

we get some of the other steps to follow. So I think we're seeing a multi leg process, but I think it starts the domino to start falling at that point.

But again, with the what these talks have been through the last three years, I think it can be a huge leg up when that rescheduling is actually put rules in place, because all you have to do is look at average trading volume for a multi billion dollar company that's our top holding, like Green Thumb Industries GTI or Gtbif look at it versus till Ray, and it is insane the numbers till Ray canopy. Those stocks trade tons

of volume listed on NASDAK. You know, all types of funds and institutions can invest in them if they want or shorten them if they want, and the US trading volumes are just anemic. So you know, we're very proud that our fund is here as a as a tool, as a path so people can invest in these US stocks because again, the individual stocks that we invest in are they're not available a lot of places, and they're comparatively low volume.