AdvisorShares lists marijuana ETF, but why not physically backed?

AdvisorShares is listing an actively managed marijuana ETF that aims to give exposure to the recreational drug. The AdvisorShares Pure Cannabis ETF (YOLO) will invest in companies that make more than 50% of their revenue from marijuana and hemp. It will also invest in companies that do not make money from marijuana, but, in the opinion of AdvisorShares, may do so some day.

The prospectus indicates the fund will invest 25% or more in pharmaceuticals, biotech and life sciences within the health care sector. This makes part of the fund not too different from healthcare biotech ETFs like iShares’ IBB and State Street’s XBI.

The fund will charge 0.74%, making it one basis point cheaper than its competitor MJ. The fund will sit alongside AdvisorShares Vice ETF (ACT), which tracks the “sin” industries.

Analysis – How about a physically backed marijuana ETC?

We have physically backed ETFs for all kinds of things: precious metals, industrial metals and even bitcoin. So how about one for marijuana?

Here’s how it could work: an ETF provider could get APs to deliver a fat stash of weed for every creation unit. The bag of weed would then be held with some trusted custodian, who would quality test it…

… just kidding

As far as marijuana exposure goes, active management makes sense. It’s not legally possible to start a nationwide marijuana business in the US. So going through and figuring out which companies might reap a headwind seems like a sensible way to proceed.

But is marijuana a good long-term bet? For my part, I am unsure how much money there is money to be made in legal marijuana farming and dealing. Yes: drug dealers, drug traffickers and drug cartels make a killing. But for me, Milton Friedman was right when he warned that they only do so because drugs are illegal.

“By keeping goods out and by arresting, let’s say, local marijuana growers, the government keeps the price of these products high. What more could a monopolist want? He’s got a government who makes it very hard for all his competitors and who keeps the price of his products high. It’s absolutely heaven,” Prof Friedman said.  

From a commerciality perspective it’s interesting to see where AdvisorShares thinks the market for this product is. One suspects it will have to be retail investors, and young less informed ones at that.

There’s a few ways of detecting AdvisorShares’ slant. The first is the ticker: YOLO, which means “you only live once” in the internet-speak meme culture popular with the under-35s. The second is perhaps the asset class itself.

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