MJUS - MJUS: A First Look Says No Thanks

2023-10-16 08:00:00 ET

Summary

• The ETFMG U.S. Alternative Harvest ETF focuses on stocks in the cannabis business, pharmaceuticals, biotechnology, and life sciences sectors.
• The ETF has never paid a dividend and has a high concentration of Canadian stocks, adding currency risk.
• The performance of the ETF has been disappointing, indicating that the cannabis industry may not be as lucrative as initially anticipated.
• The ETF is down over 80% since it was launched says it all. But, for the gamblers with great timing, there were times when the ETF price popped.

Introduction

My first exposure to marijuana or as referred to then: mary-jane or simply pot, was as a freshman in college fifty years ago. While I never "toked", I became familiar with the distinct smell as my "smoking" friends had the only tv on the dorm floor. The preferred inhaling method was via a bong, thus the photo choice for the article. Back then smoking pot was illegal everywhere in the United States and expulsion from college was the announced punishment but in my four years, I think that was rare even though having a fan in your dorm window when it was below freezing outside was a sure sign what was occurring on the inside.

While still illegal at the Federal level, things have changed drastically since then. As of last November, only four states had marijuana fully illegal.

This gap between state and federal laws poses issues for industries like banks who worry about processing credit card purchases or other online transactions.

This review covers the ETFMG U.S. Alternative Harvest ETF ( MJUS ), which includes other stocks besides cannabis that the underlying index provider believes will benefit from greater acceptance of this substance beyond just "lighting up".

ETFMG U.S. Alternative Harvest ETF review

Seeking Alpha describes this ETF as:

They ETFMG U.S. Alternative Harvest ETF was launched and managed by ETF Managers Group LLC. It invests in stocks of companies operating across cannabis business, pharmaceuticals, biotechnology and life sciences industry sectors. The fund seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets (plus any borrowings for investment purposes) in securities of companies that derive at least 50% of their net revenue from the "Cannabis Business" in the United States. It will will concentrate at least 25% of its investments in the Pharmaceuticals industry and Equity Real Estate Investment Trusts (REITs) industry groups. The fund benchmarks the performance of its portfolios against the Prime U.S. Alternative Harvest Index . The ETF started in 2021.

Source: seekingalpha.com MJUS

MJUS has only $124.6m in AUM and comes with 76bps in fees. The ETF has never paid a dividend.

Index review

The index manager provides these details about their index:

The cannabis opportunity in the United States is growing exponentially. From state legalization to potential federal law changes, the path towards legitimacy for this market has never been clearer. Whether it is for medicinal purposes or adult use recreational, the US cannabis market is rapidly developing. The Prime US Alternative Harvest Index provides a reference measure for the US cannabis industry. The index is designed to measure the performance of companies engaged in Cannabis Business in the United States.

The cannabis business is defined as:

• Cultivating, producing, marketing, or distributing cannabis, including industrial hemp,
• Producing, marketing, or distributing products containing cannabis-derived products,
• Producing, processing, marketing, transporting, or distributing prescription drugs, supplements, or food products that included cannabis or cannabis-derived products,
• Providing products or services designed for, or used by, companies in the cannabis industry, including technology, real estate, or financial services.

Source: primeindexes.com

The index holds these 15 stocks with 70% of the exposure to Canadian companies that mainly do business in the US, which adds currency risk to the ETF.

Holdings review

A good eye will notice that the ETF does not hold three of the index components (CBST, GLASS/A/U, PLTH), which represent almost 8% of the index. You will notice the ETF is also short cash and other assets to the tune of over 60%. Many of the stocks have the code "TRS" in the CUSIP column; those are the Canadian stocks and must have to do with how a US ETF is allowed to "hold" such stocks. TRS stands for Total Return Swap and is defined as such:

A total return swap is a derivative contract where one counterparty pays sums based on a floating interest rate, for example Libor plus a given spread, and receives payments based on the return of a reference asset such as a bond, stock or equity index. The returns include any gains or losses in the reference asset's price as well as any relevant coupon or dividends over the period. The swap allows a buyer to gain exposure to an asset without owning it, in exchange for taking on the price and default risk.

Source: risk.net/definition/total-return-swap

In my view, the need to use TRSs for most of the stocks held adds complexity to the ETF and helps explain the high fees for an index-based ETF.

Distribution review

This ETF has yet to pay a dividend.

Performance and risk review

I chose to include the iShares S&P Small-Cap 600 Value ETF ( IJS ) as a reference ETF after using an ETF comparison tool that showed the MJUS was heavily invested in Small-Cap Value stocks.

A couple of thoughts about the above results:

• The bloom is off the bud, at least for now for cannabis stocks.
• When adding a Large-Cap ETF comparison, I saw SCV stocks held their own so that wasn't the cause of the "up in smoke" results for this ETF.

Even with the price pattern for MJUS being steadily in one direction, the ETF had a StdDev value near double what the IJS ETF investors saw.

Ongoing risks

Currently, it seems unlikely that any state will reverse direction and add limits to or recriminalize possession of small amounts of marijuana, there are also few states outside Texas where liberalization would change the overall size of the legal marketplace. That poses a risk when so many start-ups (and a few major players) are going after the same business. As I talked about later, the rush to build casinos in New Jersey resulted in many filing for bankruptcy (5 of 12) as the mantra, "built it and they will come" failed, at least to draw the high rollers away from Las Vegas. The net result was the existing casinos were cannibalizing the same customer base; not expanding it. We could be seeing the same in the cannabis world.

Also, parallel with the gaming industry, an additional risk exists: underground (red illegal) competition. For casinos, that comes from the old-fashioned "number runners" who might be offering better odds and no need to take a trip. For the cannabis industry, it's the illegal drug trade in marijuana and harder drugs. Both can cause legal marijuana to fetch lower prices.

On the positive side, the legalized marijuana market is worth $64 billion, nearly tripling over the last three years as legalization efforts swept the nation, a Coresight Research report found. Also, about two-thirds of marijuana users in Coresight's study said they've increased their drug usage since it was legalized.

Portfolio summary

I lived in the Mid-Atlantic area when New Jersey opened up Atlantic City to legalize gaming. Resorts International was the first casino hotel in Atlantic City, thus becoming the first legal casino outside of Nevada in the United States when it opened in the spring of 1978. I tried to find a price chart from then and did not, but the following news clip will illustrate the point I want to make.

Resorts International, which is so far the only company with an operating casino in Atlantic City, saw its stock score the most sensational gains yet in what was already the stock market's highest flying performance of 1978, defying predictions that its bubble is due to burst.

Resorts class "A" stock jumped 23 points to 190, following a gain of 17 points on Tuesday and 15 points on Wednesday. Its low for the year is 15 and two years ago it was trading at just over $2 a share.

Source: washingtonpost.com/archive/business/1978/09

Like some of the meme stocks recently, the price was on a one-way ride; until it wasn't. I visited the casino and found its dark color scheme and cramped space non-inviting. By the time Playboy opened its glitzy casino in 1981, the tide was going out. What's my point? When states started liberalizing their laws either by legalization or decriminalization, sellers rushed in. After the initial highs, as the ETF performance shows, too much smoke, and not enough results. From that viewpoint, I have to give the MJUS ETF a Strong Sell: take your loss and move on! For the gamblers in the house, as recent price movements have shown, good timing and walking away from the table with your winnings can produce next-sized gains.

For that crowd, it could deserve a Strong Buy. For me, my 1973 opinion still stands: just say no (thanks).

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