TLRY - MSOS: Investors Are Redeeming This Cannabis ETF's Shares

Summary

• I have been watching MSOS since before it launched.
• Before its collapse, I warned investors about its high concentration in just the five largest MSOs.
• The ETF has been adding shares extensively, but recently there have been redemptions.

I wrote about popular AdvisorShares Pure US Cannabis ETF ( MSOS ) in mid November, and I warned about its concentration in the five largest publicly-traded multi-state operators, Cresco Labs ( OTCQX:CRLBF ), Curaleaf ( OTCPK:CURLF ), Green Thumb Industries ( OTCQX:GTBIF ), Trulieve ( OTCQX:TCNNF ) and Verano Holdings ( OTCQX:VRNOF ) as being excessively high at 75%. As of Monday, Jan. 9, the ETF, which is leveraged by 2.3%, is now 80% in those five stocks.

MSOS has plunged since I wrote about it, falling by 40.6%. Since then, the New Cannabis Ventures Global Cannabis Stock Index has dropped 26.1%, and the more appropriate New Cannabis Ventures American Cannabis Operator Index has declined by 36.6%. For 2022, MSOS declined by 72.7%, which was behind the 70.4% decline in the Global Cannabis Stock Index and the 65.8% drop in the American Cannabis Operator Index.

Size is Shrinking

I shared a chart in the mid November article that illustrated the torrid growth over the past 2-plus years in shares outstanding. At the time, there were 61.275 million shares, up 57.6% from a year ago. In the past three weeks, though, the share count has declined by 9.9% to 61.915 million, up 36.4% from a year ago.

Stock Trades at a Discount to Net Asset Value

For the past few weeks, the stock has closed at a discount to its Net Asset Value. Friday, for example, the discount was 1.4%. It exceeded 2% in late 2022.

What Investors Should Do

I'm not overly concerned that MSOS will keep declining, but I continue to believe that there are better options for people who want to invest in the cannabis sector.

When I wrote the piece in mid-November, I disclosed that I had no positions in any of the five largest MSOs in my model portfolios, but I do presently have exposure to VRNOF in my model portfolio Beat the Global Cannabis Stock Index, which is filled with Tier 2 holdings and also, among smaller MSOs, Planet 13 Holdings ( OTCQX:PLNHF ), which I detailed for readers in mid-December.

In addition to seeing relative value among the slightly smaller MSOs, I continue to find value in the ancillary names and wouldn't want to avoid them by focusing on this ETF, which is 82% invested in the top-5 MSOs.

In my last article, I suggested that investors look into a different ETF, Tim Seymour's Amplify Seymour Cannabis ETF ( CNBS ). It has far outpaced MSOS since then:

CNBS has some issues that concern me, but it looks better than MSOS. One big negative, in my view, is the tiny size at $33 million. It does trade at a discount to its NAV, but the discount is less than at MSOS. The amount invested in the five largest MSOs, 31%, and is a lot lower than the 82% at MSOS. The ETF holds a big position in Tilray ( TLRY ), its third largest, and I don't think this makes much sense. It also has a position greater than 5% in Cara Therapeutics ( CARA ), which I don't think is a cannabis company at all. The ancillary exposure is about 15%, which is much lower than I think it should be. While MSOS is a little leveraged, CNBS has cash of almost 13%.

Conclusion

I remain cautious on MSOS despite the large decline. The ETF is poorly structured, with 82% exposure to the five largest MSOs. It's trading at a discount to its NAV and facing near-term redemptions. Cannabis investors can do better for themselves by creating a more diversified portfolio that looks at more MSOs or that includes other sub-sectors, like ancillaries, and I named an ETF that is doing better and should continue to do so.

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