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