Dan Ahrens specializes in portfolio management of highly regulated areas including cannabis and other vice-related investments. He is portfolio manager of the AdvisorShares Pure US Cannabis ETF (MSOS), the largest publicly traded cannabis fund. Dan is also the author of Investing in Cannabis: The Next Great Investment Opportunity.
Russ Prince: What is the opportunity for investors in the cannabis industry and how does AdvisorShares play a role in this opportunity?
Dan Ahrens: I see cannabis offering a growth opportunity similar to that of the alcohol industry post-prohibition. However, today, the world moves much faster and advancements in technology and science are uncovering new opportunities for uses of the cannabis plant.
Right now, cannabis is valued as a $25 billion industry and projected to hit growth rates of 25% or more, year over year for the next five years. Additionally, we are just scratching the surface on the different uses for the cannabis plant. Remember, this is a multi-sector opportunity and will have a competitive impact in the leisure alcohol consumption industry, the tobacco industry, industrial hemp, and the textile industry, and perhaps the biggest impact of cannabis resides in the medical and pharmaceutical space as a real solution to combat the U.S. opioid crisis with a natural plant-based solution.
Some detractors might view cannabis as a “commodity” with prices going down over time. While I agree that the production costs will go down over time, the investment opportunity is far more focused on the products developed from the plant. Similar to coffee, cannabis products will develop parallels with their pricing flexibility by offering lower-cost and higher-end consumer alternatives—think McDonalds versus Starbucks.
AdvisorShares delivers a range of ETF strategies to the marketplace, including thematic ETFs that provide investment exposure to highly regulated areas like cannabis, as well as psychedelics and other vice-related investments.
Prince: What are the current risks and challenges to investing in the cannabis industry?
Ahrens: Two main challenges exist with investing in the cannabis space right now: the size of the market and the unique legalization laws in the United States.
Many companies in the cannabis space are still in the very early stages of development with many at the micro and small capitalization levels, and with a few in the mid-capitalization range. This setup creates a good opportunity for investors with an appetite for risk. Unlike what we have seen in the tech space where companies leverage private markets when they are smaller-sized, which only creates opportunities for accredited investors, the cannabis industry is coming to the public markets much earlier. I think that presents a good opportunity for investors who are comfortable with that early-stage company risk.
The second hurdle is operating within a patchwork of individual state cannabis laws throughout the United States. While it may be federally illegal with no interstate opportunities, almost 40 states have legalized cannabis for either adult recreational use or for medical use.
I see similarities to what other innovative, disruptive companies faced, such as Uber and Airbnb who also did not fit under the existing rules and regulations for taxis and hotels. And like what we saw with Uber and Airbnb, the regulatory solutions usually follow the success of those disruptive companies. However, one significant difference between Uber, Airbnb and cannabis is the strong political motivation to legalize cannabis for the purpose of increasing tax revenue at the local, state and federal levels.
I expect changes at the federal level at some point in the future and much progress has already been made including the 2018 Farm Act, which legalized hemp usage with limits on the amount of THC—the psychotropic portion of cannabis—that can be contained in hemp-derived products. Other proposed legislative reforms including the SAFE Banking Act would allow banking services, tax relief from 280e, and access to investment banking capital. While I do not know exactly when federal law changes will occur, I see it as a matter of “when” and not “if.”
Prince: How can our audience evaluate and consider investing in this space?
Ahrens: The cannabis industry is still in the early life cycle stage. As it evolves, there will be both winners and losers. It is not much different from what we saw in technology’s development—remember Netscape? Some of today’s cannabis companies will not survive.
I also anticipate significant merger and acquisition activity in the future. Because the cannabis industry is a rapidly evolving marketplace, AdvisorShares endorses an active and opportunistic approach. I believe the biggest investment opportunity resides in the near-term of the U.S. market.
Investors comfortable with the risks of this emerging category may be interested in evaluating the AdvisorShares Pure US Cannabis ETF—NYSE ticker: MSOS, which as of the end of February held over $1 billion USD of assets under management making it the largest cannabis ETF. MSOS delivers exposure dedicated solely to American cannabis companies, including multi-state operators, which are directly involved in the legal production and distribution of cannabis in states where approved. Investors who are less comfortable with cannabis risk may want to consider investing in companies that will likely be future acquirers in the space such as from the alcohol, tobacco, or pharmaceutical industries. A “vice” themed ETF such as the AdvisorShares Vice ETF—NYSE ticker: VICE—can provide diversified exposure to such industries.
Russ Alan Prince is the executive director of Private Wealth magazine and one of the leading authorities in the private wealth industry. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals. Connect with him on LinkedIn.com.
