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ETFMG Alternative Harvest ETF (NYSE:MJ) US Cannabis Strategy

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

ETFMG Alternative Harvest ETF (NYSE:MJ) is the largest marijuana ETF in the world and the only public marijuana ETF operating in the US. Partner Jason Wilson explains some of the advantages of the ETF for retail investors, including increased tax efficiency and easy exposure to the whole cannabis sector. Wilson reveals the Alternative Harvest ETF includes all the largest LPs in the sector but because cannabis is still illegal at the federal level in the United States, it doesn’t hold companies in violation of federal law. At minimum, companies must have a 9-digit market cap, share prices in the dollar ranges, and high liquidity to be included in the fund. Wilson is excited about the future of the cannabis space and sees consolidation, international expansion, investment from other industries, and US de-prohibition as potential value catalysts for the Alternative Harvest ETF.

Transcript:

James West:   My guest this segment is Jason Wilson, a partner with ETF MG Alternative Harvest ETF, trading on the NYSE under symbol MJ. Jason, welcome.

Jason Wilson: Thanks for having me.

James West:   Jason, what is ETF MG Alternative Harvest ETF all about?

Jason Wilson: It’s all about marijuana. We are the only publicly traded ETF in the US right now that focuses primarily on marijuana companies.

James West:   Okay. And so, do you concentrate on Canadian companies or US companies or a basket of the entire mix?

Jason Wilson: Yeah, our fundamental guideline for the US basket is, any companies we have cannot be in violation of Federal laws. So you know, we do not have the MedMens in there, we do not have, you know, Origin House now, CannaRoyalty; but we do have all of the large licensed producers. Canopy, Aurora, Tilray, companies like that; they make up over 70 percent of our holdings.

James West:   Okay, and ETF Managers Group as a management firm, how much capital under management?

Jason Wilson: Just shy of $4 billion USD.

James West:   4 billion, okay. And tell me about the management group; what drives you guys, and what’s your sort of wheelhouse?

Jason Wilson: Wheelhouse is all thematic, so I think the first large ETF broadly known for is Hack, so that’s a cybersecurity ETF. So they launched that a few years ago and then became really popular when you had the whole Sony dust-up, if your remember that.

James West:   Sure.

Jason Wilson: So that drove a lot of assets into Hack. And then they have a bunch of other thematics, as well; they have immunotherapy funds, they have a gaming fund, which was, you know, E-sports is becoming more prevalent now.

In addition to that, they have AIQ, which is a, if you’re familiar with IBM Big Blue Watson, the ETF’s effectively 4managed by that artificial intelligence, so that’s another cool one. And then MJ is, we launched back, actually December of last year. Late December of 2017.

James West:   Oh, okay, interesting. So the advantage to an investor of investing in an ETF as opposed to investing with a fund or a money manager?

Jason Wilson: Core things is efficiency. So with respect to the US in particular with ETFs, there’s a tax efficiency. As units are created and redeemed, it’s done through a physical exchange of securities, a creation/redemption process. And what that means is, the transactions happen outside of the fund, so we don’t have, when there’s rebalances, when there’s, you know, any kind of changing in the constituents for extraordinary events, that’s done effectively externally – so we don’t have any tax drag in the fund.

It also bears a lot of the transaction costs outside with the market makers that run it. So it’s a little bit more efficient from a cost perspective and a tax perspective, and of course you get a lot of liquidity trading on NYSE.

James West:   So what is the value proposition in terms of a retail investor investing in an ETF versus some other type of asset manager?

Jason Wilson: The primary one right now is, well first off, MJ is the only, call it, marijuana-focused fund in the US, period. And then just generally speaking, with ETFs generally versus a managed account or picking your own stocks, it’s one trade that provides exposure to the whole sector. And there is a lot of folks in the US that are struggling how to pick winners and losers; no one knows how this is going to shake out, we’re in the early innings of this game. So what we try to do is provide as much exposure to the cannabis industry in totality; so that’s the main purpose behind the ETF. It’s a cost-effective way for investors to get that one-trade access.

James West:   Okay. So then, how has the ETF performed relative to other asset baskets in the MJ space?

Jason Wilson: there really isn’t any other asset basket. I mean, this is the interesting thing with thematic ETFs – it’s not like you have, you know, if you look at SPY, the big ETF in the US that tracks the S&P 500, you can benchmark it to that; with a thematic, you’re really just, it’s a rules-base formula that rebalances quarterly, and you’re just going after the segment. So we perform in line with our underlying constituents, but at the end of the day, it’s really, we just put in as many stocks as possible that meet our criteria; which is, do they primarily generate their revenues from, you know, the sale or production of cannabis or cannabis-related products? Things of that nature.

And we filter them through for market cap and liquidity requirements, and such that we can actually trade the vehicle appropriately, and that’s what determines what we are. So we track our own index; it’s, so at the end of the day, we just perform relative to how the space goes.

James West:   Hmm. Interesting. Then, so, how has the cannabis ETF performed relative to the S&P?

Jason Wilson: Oh, well it’s all over the map – pick your day! I mean, it’s like with HMMJ, you know, where we started the year with a pretty good run, we fell back off again, and then we ramped right back up, and now we’ve kind of come back down to flat. So it’s, you know, it’s depending on your entry points, it’s been a tough slog at times, and a great run at others. It’s been a pretty volatile space.

James West:   Sure. So in terms of a minimum criteria for a company to qualify for inclusion in the ETF, what are those parameters?

Jason Wilson: Market cap – so we want a minimum size, at least a few hundred million dollars in size. We want to have a minimum share price, and that has to do with the cost of transacting in that security; if it’s just trading at $0.50 a share, because we have about $850 million in assets in Canadian dollar terms, even putting in a 1 or 2 percent allocation, if it’s a $0.50 share, obviously can lead to a lot of costs.

And then but primarily, it’s liquidity. That’s another big one, is making sure that the stocks that meet our filter for business eligibility, do they have enough liquidity? Can we actually trade them? You can imagine that, especially with some of these stocks, we might start with a 3 or 4 percent allocation sometimes, and if they run up in price like some of them have, it could turn into a 6 or 7 or 8 percent allocation.

James West:   Sure.

Jason Wilson: Then if we have to rebalance and bring it back down the line with what our guidelines are at every quarter, we might have to sell or buy a bunch of stock. So it’s making sure that we can go out, you know, the portfolio manager can go out and actually do that.

James West:   So what is your expectation for the performance and evolution of the whole sector in terms of valuation going forward, say, 12, 24 months?

Jason Wilson: 12, 24 months, I think that it’s going to be pretty, you know, reasonably stable. We had obviously a lot of euphoria in this space; there was a lot of retail money getting into these stocks. We are, everyone is really in growth mode; I think that over the next 20 to 24 months you’ll start to see execution on business plans, and that’s what we’re really looking forward to see, is how these companies that are in the ETF actually perform.

And you’ll start probably seeing some winners and some losers and maybe a little bit more consolidation. I think you’re also going to see other companies potentially entering the space; it could be on a biosynthesis side, it could also be, if we have passage of the Farm Act or the States Act with, you know, a new House down in the US, who knows – our universe could expand a little bit, too.

But I think overall, we’re going to see in the short to medium term, you know, a lot of volatility, but a general trend upwards, and then but over the long haul, clearly this is a new space expanding globally where we would expect to see a lot of growth down the road.

James West:   Right. Okay, so the advent of de-prohibition in the United States, I imagine, would represent quite a broad sector catalyst that you would expect to really open up the landscape in the Unites States. And some asset managers in Canada have expressed that they’re already lightening up on the Canadian side and going more, positioning more for the US opportunity in anticipation of an eventual de-prohibition Federally. Is that sort of in line with what the ETF is strategizing, at this point?

Jason Wilson: Absolutely. So first off, we capture any company that is in the space legally. So even though we cannot include right now some of the companies with US operations, so up until recently Aphria was not in our fund, as an example, but when they divested their US holdings, then we were able to clear them on our next rebalance.

But we’re seeing with a lot of the companies that are in the fund right now, how they are, in fact, positioning themselves in the US. Where they’re either doing that through partnerships or acquiring, you know, looking at research opportunities, or maybe it’s on the branding side, licensing side. We’ve seen TGOD do a number of things in that space recently.

So it’s, the fund, through its constituents, is definitely benefitting from that, as well as the global expansion. And ultimately, when there is, even if it’s through the States Act or through the Farm Act if that makes its way through Congress next year, we would then be able to start putting certain of the US companies into our fund as well.

James West:   Okay. So is the objective in the management of the fund to manage volatility on behalf of the unit holder, of the ETF holder, and is that part of the attraction?

Jason Wilson: I wouldn’t say to manage volatility directly; a large part of what the portfolio manager does in the thematic fund like this is making sure that the fund goes in and out of positions if it ever needs to change its weightings, prudently. So that is part of it, and if you, you know, if you think of it, where if suddenly we have to, if one of the companies doesn’t meet our criteria and we have to remove them, we can’t just sell all those stocks in one day.

So that’s one thing with ETFs – even though you track an index in theory, the index the next day will suddenly not have that stock. The ETF might not be able to suddenly able to have that stock; it wouldn’t be prudent to just go out and sell it.

So yes, you’re right that they allow the investor to track the index, and maybe sometimes not so precisely, because of the volatility it could cause in the market. So that’s a subject of judgement call. But the bigger benefit to the investor is to be able to participate in the whole space rather than in one spot.

James West:   Okay. Well, that’s really interesting, Jason, and we appreciate the insight, and we’ll have you back on the show at regular intervals as this whole sector unfolds. Thank you very much for joining me today.

Jason Wilson: Thanks for having me. Appreciate it.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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