Investors Are Redeeming This Cannabis ETF’s Shares (NYSEARCA:MSOS)

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.

Investors Are Redeeming This Cannabis ETF’s Shares (NYSEARCA:MSOS)

I wrote about popular AdvisorShares Pure US Cannabis ETF (NYSEARCA: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.

MSOS shares outstanding
MSOS shares outstanding (Alan Brochstein (with AdvisorShares data))

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:

YCharts chart
YCharts

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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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