WEBVTT - ETF of the Moment: A Budding Comeback for Cannabis 0:00:02.480 --> 0:00:09.119 Bloomberg Audio Studios, Podcasts, radio News. 0:00:13.400 --> 0:00:14.120 Welcome to Trains. 0:00:14.160 --> 0:00:16.360 I'm Joel Webber and I'm Eric Valchunis. 0:00:18.520 --> 0:00:21.720 We've been experimenting with some new things on Trillions. One 0:00:21.800 --> 0:00:25.720 is a new episode that is three ETFs that are 0:00:25.720 --> 0:00:28.760 new launches tickers to watch. This is going to be 0:00:28.920 --> 0:00:33.239 another ongoing new episode that we're going to do about 0:00:33.280 --> 0:00:37.520 an ETF of the moment. What's going to be uh, 0:00:37.560 --> 0:00:39.239 the one that we're talking about this episode. 0:00:40.440 --> 0:00:43.080 Yeah, just a little background on this. So we write 0:00:43.080 --> 0:00:46.120 a note for BI that comes out every month that 0:00:46.159 --> 0:00:48.640 we look at one ETF that's sort of like, we 0:00:48.640 --> 0:00:50.360 don't want to look at something that just performs so 0:00:50.400 --> 0:00:52.840 well over the past year or three years, but what's 0:00:52.840 --> 0:00:57.000 something that's like performing well in the recent month or 0:00:57.040 --> 0:01:00.720 two and has seeing more volume. So if it like 0:01:01.240 --> 0:01:04.360 starts the scene way above average numbers in the short 0:01:04.440 --> 0:01:07.440 term relative to its averages, we want to highlight that 0:01:07.520 --> 0:01:10.119 because it's like a swell before it becomes a wave potentially, 0:01:10.640 --> 0:01:14.040 and so we and also when you use these quantitative measures, 0:01:14.040 --> 0:01:15.800 you come up with ETFs that aren't obvious. You know, 0:01:15.840 --> 0:01:18.560 we're not picking the same ten that everybody knows. So 0:01:19.080 --> 0:01:21.720 this is a way to unearth some interesting like up 0:01:21.720 --> 0:01:26.360 and coming future star ETFs. And so we've done this, 0:01:26.800 --> 0:01:28.600 I don't know about ten times. It's good to do 0:01:28.640 --> 0:01:30.880 a podcast after because people again looking for tickers and 0:01:30.880 --> 0:01:33.880 investment ideas. The one we're going to focus on today 0:01:34.520 --> 0:01:38.840 is a ticker MSOs for people who don't know what it's. 0:01:38.880 --> 0:01:44.039 The Advisor Shares Pure US Cannabis ETF, which is one 0:01:44.080 --> 0:01:46.920 of many of them, but a sector that's been beat 0:01:47.000 --> 0:01:49.280 up really bad but just recently got some good news. 0:01:49.320 --> 0:01:51.680 And the ETFs for reflecting that and joining. 0:01:51.520 --> 0:01:56.840 Us is andre Yapp, who's then Bloomberg Intelligence ETF Research Associate. 0:01:57.240 --> 0:01:59.160 Welcome back to trillions, Andre, good to have you here, 0:01:59.600 --> 0:02:00.640 Thank you. Pleasure's mine. 0:02:00.760 --> 0:02:04.320 Okay, So why is this an ETF of the moment? 0:02:05.040 --> 0:02:07.200 So it kind of goes back to the criteria that 0:02:07.200 --> 0:02:10.440 we established earlier. Eric mentioned we are looking for an 0:02:10.440 --> 0:02:12.880 ETF that's having a moment in terms of its return, 0:02:13.000 --> 0:02:15.800 but not just that, but has increased trade in volume, 0:02:16.120 --> 0:02:19.000 and this ETF fits the bill. During the past month, 0:02:19.040 --> 0:02:21.680 it's up about forty four percent while it's trade twenty 0:02:21.680 --> 0:02:24.280 four forty four percent. And I'll get to why it's 0:02:24.280 --> 0:02:26.720 of forty four percent, while its tradeing volume is up 0:02:26.760 --> 0:02:29.800 about fifty six percent. So it's definitely halving a moment 0:02:30.000 --> 0:02:33.160 right now. Okay, the reason is happening a moment right 0:02:33.200 --> 0:02:36.480 now is because of the legislative landscape. Is it legislative 0:02:36.520 --> 0:02:37.200 or regulatory. 0:02:37.400 --> 0:02:38.760 Either way, it's fine. 0:02:38.880 --> 0:02:43.680 That language has changed. It's gotten a bit more accommodating 0:02:43.800 --> 0:02:46.520 to the cannabis industry. So what's happening is that the 0:02:46.520 --> 0:02:50.200 Department of Justice has moved marijuana from a scheduled one 0:02:50.280 --> 0:02:54.360 narcotic or drug to a scheduled three drug. What that 0:02:54.520 --> 0:02:57.320 means is that it's no longer subject to the most 0:02:57.400 --> 0:03:03.120 draconian or strict rules, and it's now subject to less 0:03:03.120 --> 0:03:07.919 strict rules, but still within the confines of a regulatory structure. 0:03:08.000 --> 0:03:08.680 Yeah, so it's. 0:03:08.560 --> 0:03:11.880 Gone from being super oppressed we're watching you to be 0:03:12.440 --> 0:03:13.440 you're kind of okay. 0:03:14.320 --> 0:03:18.560 So that rescheduling good thing for cannabis and cannabis companies. 0:03:18.960 --> 0:03:20.160 What all does this thing hold? 0:03:20.880 --> 0:03:23.200 Well, it holds cannabis companies. But the thing with the 0:03:23.240 --> 0:03:27.320 ETS is that it can't hold these companies the stocks directly. 0:03:27.600 --> 0:03:29.040 It holds them through swaps. 0:03:29.080 --> 0:03:30.800 Can only look in the mirror to look at it. 0:03:30.840 --> 0:03:35.040 Yeah, essentially because cannabis is still an illegal drug, so 0:03:35.120 --> 0:03:37.720 it's not trying to hold it directly because of the 0:03:37.720 --> 0:03:40.440 implications that could have, so it holds it through swaps. 0:03:40.440 --> 0:03:45.080 Its hold large companies like cure Leaf, True Leaves, Green Thumb, 0:03:45.440 --> 0:03:47.680 and other companies that are in the space. But those 0:03:47.720 --> 0:03:49.520 are the three largest companies that it holds. 0:03:49.760 --> 0:03:53.760 What are holding swaps do for you, Eric, It's like 0:03:53.880 --> 0:03:57.280 I'm not holding the drugs in my pocket. They're over there, 0:03:57.640 --> 0:03:59.760 but not on my person. 0:04:01.240 --> 0:04:04.480 So MSOs, by the way, it sort of stands for 0:04:04.560 --> 0:04:09.040 Multi State Operators. That's the name for these US based 0:04:09.120 --> 0:04:12.800 pot companies that sell and distribute pot, and because it's 0:04:12.800 --> 0:04:16.400 federally illegal, nobody can actually own them. So what they 0:04:16.440 --> 0:04:19.040 do is they use a swap, so they own a swap, 0:04:19.240 --> 0:04:22.240 not the company. It's a clever workaround and this ETF 0:04:22.279 --> 0:04:25.640 really made that move. There's been a history of ETFs 0:04:25.640 --> 0:04:29.520 where it's better to ask for forgiveness than permission, and 0:04:29.560 --> 0:04:32.000 this was one of those cases where nobody could hold 0:04:32.040 --> 0:04:33.760 the US one. So all the pot ETFs were like 0:04:33.800 --> 0:04:36.359 heavy Canada, but this one was the first one to 0:04:36.400 --> 0:04:40.400 hold US via swaps, and it was a pretty instant 0:04:40.480 --> 0:04:42.160 hit people. Definitely one of that exposure. I mean, it's 0:04:42.160 --> 0:04:44.640 all got a billion. That's pretty good for a them METF. 0:04:45.120 --> 0:04:48.080 And what I find interesting about this one is it's 0:04:48.120 --> 0:04:51.080 still down eighty eight percent even with that forty something 0:04:51.120 --> 0:04:55.440 percent return. The past month just hammered. I like, I 0:04:55.560 --> 0:05:00.839 like when Andre's quantitative screen comes up with stuff that's 0:05:00.880 --> 0:05:04.400 been like in the doghouse for a long time. Uranium 0:05:04.480 --> 0:05:06.000 was like that, and I mean it was down ninety 0:05:06.000 --> 0:05:09.360 percent when those ETFs launched. And why you have you 0:05:09.400 --> 0:05:11.960 have a longer runway, you know, you don't need a 0:05:12.000 --> 0:05:14.839 lot to go out forty percent, Like that's how bad 0:05:14.880 --> 0:05:17.600 this thing's been beaten. Now. I will say there's been 0:05:17.640 --> 0:05:21.360 a couple other headfakes in the cannabis ETFs over the years. 0:05:21.720 --> 0:05:26.120 Usually it's on this regulation, the Psychedelic CTF PSIL, which 0:05:26.160 --> 0:05:29.600 holds not cannabis companies, But like you know, Kenemine, there's 0:05:29.600 --> 0:05:31.560 a big article in Bloomberg about that. So I think 0:05:31.600 --> 0:05:36.200 this whole landscape has been so beat up that any 0:05:36.320 --> 0:05:39.400 little bit of good news sends them soaring. And this 0:05:39.480 --> 0:05:41.520 is a great catch and one that we're going to watch. 0:05:42.440 --> 0:05:46.120 And why im Sauce and not the other cannabis ETFs. 0:05:47.279 --> 0:05:50.839 The reason mostly is because it's the only one with 0:05:51.160 --> 0:05:54.479 any sizeable assets. It's literally the only cannabis etf with 0:05:54.560 --> 0:05:56.440 all the over a billion dollars in assets. 0:05:56.480 --> 0:05:59.000 Everything else, everything else got smoked. It's chump change. See 0:05:59.000 --> 0:06:02.279 what I did there, had to do it once, great fun. 0:06:02.360 --> 0:06:02.840 I love it. 0:06:03.400 --> 0:06:05.839 So that's the reason why we chose it. A lot 0:06:05.880 --> 0:06:08.400 of the other cannabis ETFs fit the criteria, but in 0:06:08.480 --> 0:06:10.800 terms of stain power based on the assets, this is 0:06:10.800 --> 0:06:13.120 the one that we have to highlight. Everything else. There 0:06:13.160 --> 0:06:15.400 are two of them right now that have like less 0:06:15.400 --> 0:06:19.280 than forty billion, forty million dollars in assets, which is nothing. 0:06:19.520 --> 0:06:21.680 Yeah, I mean this is a great point. MJ was 0:06:21.720 --> 0:06:24.840 the original pot etf. That's another one that asked for 0:06:24.839 --> 0:06:28.160 forgiveness rather than permission because the SEC wasn't letting pot 0:06:28.240 --> 0:06:30.560 ETFs happen. This is a I don't know, six seven 0:06:30.600 --> 0:06:35.240 years ago and MJ was a Latin America real estate fund. 0:06:35.800 --> 0:06:37.560 So while all the other ones were waiting in line 0:06:37.760 --> 0:06:40.800 for SCA approval, let's just had a name and strategy change. 0:06:40.880 --> 0:06:44.040 It was like, oh, let's just be cannabis now. So 0:06:44.080 --> 0:06:46.520 it did a name change to skirt the line, and 0:06:46.600 --> 0:06:49.680 it worked, like the SEC just let it go anyway, 0:06:49.920 --> 0:06:54.680 MSOs came out and because it offers those US exposure 0:06:54.760 --> 0:06:59.680 and not just Canada, everybody started moving from MJ to MSOs. 0:07:00.320 --> 0:07:02.520 So it's not only the biggest, but for this particular 0:07:02.560 --> 0:07:05.880 issue where it's a US thing, this gets a ton 0:07:05.920 --> 0:07:11.240 of US exposure. So it's checks two boxes in my opinion, How. 0:07:11.200 --> 0:07:12.320 High do you think it can go. 0:07:14.080 --> 0:07:16.960 Again with the punds, I mean, it depends on how 0:07:17.080 --> 0:07:19.560 the investing public really look at the landscape. So what 0:07:19.640 --> 0:07:22.400 happened when it moved from schedule one to schedule three. 0:07:22.560 --> 0:07:27.800 It's not an outright legalization. Essentially, the whole optimistic outlook 0:07:27.840 --> 0:07:30.880 lies around taxes. So moving from one to three, it 0:07:31.000 --> 0:07:34.840 essentially can write off regular business expenses and not get 0:07:34.840 --> 0:07:37.200 tax on it. So it's paying taxes now like a 0:07:37.280 --> 0:07:40.680 regular company, whereas before it's paying taxes on gross profits. 0:07:40.840 --> 0:07:44.200 So essentially it was revenue cost of good soul pay 0:07:44.200 --> 0:07:46.960 your taxes on that. Now it's revenue cost of good sold. 0:07:47.160 --> 0:07:50.520 Deduct all your operating expenses, which is huge, and now 0:07:50.520 --> 0:07:54.239 you can pay taxes. That leaves these companies with tremendous value, 0:07:54.280 --> 0:07:56.840 tremendous cash in their pockets, which they can used to 0:07:56.840 --> 0:07:59.440 do other things. They can scale their business to other states, 0:07:59.480 --> 0:08:02.400 they could poss acquire other businesses that are smaller and 0:08:02.440 --> 0:08:06.000 not necessarily doing so well. So it gives them a runway, 0:08:06.040 --> 0:08:08.880 so to speak. But at the same time, we have 0:08:08.920 --> 0:08:11.760 to recognize that what it does is it gives it 0:08:11.920 --> 0:08:15.320 medical uses. And medical uses is about twenty five percent 0:08:15.520 --> 0:08:20.480 of these companies' market share, I guess, But the other 0:08:20.560 --> 0:08:23.760 seventy five percent it lies in recreational adult use. 0:08:24.000 --> 0:08:27.200 So these states where it's been legalized exactly, that. 0:08:27.200 --> 0:08:30.640 Is the portion that I think investors would really leap 0:08:30.680 --> 0:08:33.800 at if that becomes unlocked, because that right now, that's 0:08:33.920 --> 0:08:37.720 the ceiling that these companies are essentially facing, and that 0:08:37.880 --> 0:08:39.760 ETF essentially incouncerts as well. 0:08:39.960 --> 0:08:44.240 Okay, so there is a modest footnote for the tax 0:08:44.960 --> 0:08:46.040 set up that you're describing. 0:08:46.080 --> 0:08:47.640 Now, what is the footnote? 0:08:48.080 --> 0:08:51.800 Yeah, So in the rescheduling, what it does is it 0:08:51.800 --> 0:08:57.199 gives provisions for medical marijuana. So businesses with a portfolio 0:08:57.280 --> 0:09:01.160 that encompasses both medical and recreational use, that tax benefit 0:09:01.240 --> 0:09:04.760 only applies to the medical side. The recreational side still 0:09:05.120 --> 0:09:07.480 has to adhere to the old regime where it pays 0:09:07.520 --> 0:09:10.320 taxes on gross profits, so it's not able to duct 0:09:10.400 --> 0:09:14.280 regular business expenses. However, the medical side that will be 0:09:14.320 --> 0:09:17.640 able to do that. So there's a new dynamic, so 0:09:17.720 --> 0:09:19.559 to speak, for these companies where they have to kind 0:09:19.559 --> 0:09:21.400 of total line and separate their business. 0:09:21.520 --> 0:09:22.760 And most didn't have both. 0:09:23.080 --> 0:09:25.480 Yes, So what you're kind of describing here is an 0:09:25.520 --> 0:09:29.520 industry that's been basically put in paralysis and then all 0:09:29.520 --> 0:09:31.960 of a sudden like sort of coming out of that. 0:09:32.320 --> 0:09:35.000 It's like that that MJ moment that we were talking 0:09:35.000 --> 0:09:39.199 about years ago never came. But now that they've been rescheduling, 0:09:39.320 --> 0:09:42.120 we're in a whole new dynamic somewhat. 0:09:42.200 --> 0:09:45.040 So it's like you've been shackled really tightly in the 0:09:45.080 --> 0:09:47.320 handcuffs and been loosened a little bit. I wouldn't really 0:09:47.360 --> 0:09:50.920 call it liberalization, but your arms aren't being chafed anymore. 0:09:51.040 --> 0:09:53.320 Absolutely, I mean, this is evol to ETF. It should 0:09:53.360 --> 0:09:57.080 be treated with care. Most people who would add this 0:09:57.120 --> 0:09:58.480 to a portfolio are going to add it in a 0:09:58.559 --> 0:10:01.200 like a one percent allocation. Again, in that sort of 0:10:01.200 --> 0:10:03.280 ten to fifteen percent hot sauce bucket. I think it 0:10:03.320 --> 0:10:05.439 would fit fine there if you're bullish on the industry. 0:10:06.000 --> 0:10:08.480 I know, Joel, I'm a big like Peter Lynch guy, 0:10:08.600 --> 0:10:11.400 like to walk around and see stuff, and I don't 0:10:11.400 --> 0:10:14.040 think a day goes by where I'll smell marijuana on 0:10:14.080 --> 0:10:16.439 the street, whether I'm in New York or Philly. Like 0:10:16.559 --> 0:10:20.680 it's pretty much accepted as a no big deal anymore. 0:10:21.120 --> 0:10:24.000 The question is like how many people will recreationally use it, 0:10:24.520 --> 0:10:28.960 because there are definitely there's some pushback that like, okay, fine, 0:10:29.000 --> 0:10:31.720 it's legal, but like I've definitely seen on social media 0:10:31.760 --> 0:10:35.280 people like this really like kills your whole ambition and 0:10:35.320 --> 0:10:37.800 like almost like the things that like Nancy Reagan used 0:10:37.800 --> 0:10:39.880 to talk about are like coming out naturally from people. 0:10:39.960 --> 0:10:41.760 It's like, yeah, it's legal, but like do you really 0:10:41.800 --> 0:10:44.960 want to like make yourself lazy? I also think there 0:10:44.960 --> 0:10:47.840 are some reasons to use it to like help kill 0:10:47.920 --> 0:10:51.240 pain that aren't painkillers, and that's a whole big thing. 0:10:51.360 --> 0:10:53.840 So I could, you know, I think you have to 0:10:53.880 --> 0:10:56.160 really I would rush up on the industry and make 0:10:56.160 --> 0:10:59.640 sure you're bullish, but there is a I mean again, 0:10:59.760 --> 0:11:01.680 things that are beaten up. I've been around long enough 0:11:01.720 --> 0:11:04.079 that I've seen it where it doesn't take a lot. 0:11:04.600 --> 0:11:07.319 MSOs also has a leverage version. I mean, if you 0:11:07.400 --> 0:11:12.560 really want some like Kalipino like Ghost Pepper, msox is 0:11:12.559 --> 0:11:16.400 two x MSOs. So if it's a short term bet 0:11:16.440 --> 0:11:18.679 that that would you know, go into jackpot mode if 0:11:18.720 --> 0:11:20.840 you had a good news on the regulatory front and 0:11:20.880 --> 0:11:23.719 the other thing is on regulatory I think everybody thought 0:11:23.720 --> 0:11:25.839 it was the Democrats who were going to like make 0:11:25.880 --> 0:11:28.520 this okay. So the fact that it's a Republican president, 0:11:30.160 --> 0:11:32.600 I think that's probably also a pretty good sign that 0:11:32.720 --> 0:11:34.960 like both parties seem to be like comfortable with this. 0:11:35.360 --> 0:11:39.839 Bloomberg Intelligence has a traffic light system to evaluate sort 0:11:39.880 --> 0:11:42.679 of what the holdings of an ETF are. I'm curious 0:11:42.679 --> 0:11:46.040 how something like a swap would mesh with that green 0:11:46.120 --> 0:11:47.560 light system. How do you guys evaluate it? 0:11:48.520 --> 0:11:51.920 Yeah, this would get yellow for two dings, uses derivatives 0:11:52.040 --> 0:11:56.560 and also the fact that it's active. You know. So, 0:11:57.160 --> 0:12:00.000 but that's it's pretty vanilla. It's probably i would say, 0:12:00.800 --> 0:12:04.800 the equivalent to like a PG thirteen movie, but that 0:12:04.920 --> 0:12:07.760 leans heavy in violence or something, okay, or maybe drug use. 0:12:07.800 --> 0:12:10.000 In this case, Gummy's all Right, there we go. 0:12:10.520 --> 0:12:13.000 No, no, this this ETF is like the movie Dazed 0:12:13.000 --> 0:12:13.640 and Confused. 0:12:13.800 --> 0:12:14.880 Okay, you know what I mean. 0:12:15.240 --> 0:12:15.960 All Right, there you go. 0:12:16.400 --> 0:12:19.320 A classic. All right, andre Yamp, thanks for joining us 0:12:19.320 --> 0:12:19.720 in Trillions. 0:12:19.920 --> 0:12:20.960 Thank you for having me. 0:12:27.880 --> 0:12:30.800 Thanks for listening to Trillions until next time. You can 0:12:30.800 --> 0:12:35.160 find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, 0:12:35.760 --> 0:12:38.120 or wherever else you'd like to listen. We'd love to 0:12:38.120 --> 0:12:41.240 hear from you. It is up on social. Trillions is 0:12:41.280 --> 0:12:50.760 produced by Magnus Hendrickson and Kishev Pontia. Bye.