MJUS vs. MSOS: Which U.S. Cannabis Market ETF Looks Better?

The legalization story in the United States is both the biggest potential growth driver as well as the largest headwind.
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The ETFMG Alternative Harvest ETF (MJ) was the first cannabis-focused ETF to hit the marketplace back in late 2017 when it was converted over from a Latin American real estate fund. Since then, it has consistently been the largest marijuana ETF available with roughly $1.6 billion in assets under management.

Like most ETFs in this space, it focuses on the global cannabis market, which primarily consists of the United States, Canada and the United Kingdom. While this industry is growing rapidly all around the world in terms of acceptance and legality, it looks like the U.S. market could experience the greatest growth over the next several years.

Global Cannabis Market Share

Global Cannabis Market Share

The legalization story in the United States is both the biggest potential growth driver as well as the largest headwind. At a state level, more and more states are either legalizing or decriminalizing marijuana use at various levels, but the federal government has yet to fully jump on board. The results of a number of state election initiatives over the past few years have demonstrated that Americans continue to get on board with cannabis and a federal legislation package that approves marijuana use at either the medical or recreational level (or both) could unlock a lot of the U.S. market's growth potential.

U.S. Legal Cannabis Market Growth

U.S. Legal Cannabis Market Growth

As it stands today, only a few states remain holdouts that make marijuana use fully illegal.

State By State Marijuana Legalization

State By State Marijuana Legalization

The ETFMG U.S. Alternative Harvest ETF

That could make focusing your investments on the U.S. cannabis market instead of the global market could potentially give your portfolio a little more pop. The AdvisorShares Pure U.S. Cannabis ETF (MSOS) already exists, but its year-to-date return is easily the lowest among the 7 major existing marijuana ETFs as U.S. returns continue to lag. Going forward, I still like MSOS to outperform in this space, but there's another ETF recently launched that looks to take advantage of the same market.

The ETFMG U.S. Alternative Harvest ETF (MJUS) will largely have the same portfolio construction process as MJ, but will focus strictly on the United States cannabis market.

MJUS ETF

MJUS ETF

According to fund documents:

The Fund seeks to achieve its investment objective by investing....in securities of companies that derive at least 50% of their net revenue from the “Cannabis Business” (as defined below) in the United States, and in derivatives that have economic characteristics similar to such securities.

The Cannabis Business is defined as: (i) cultivating, producing, marketing or distributing Cannabis, including industrial hemp (ii) producing, marketing or distributing products containing Cannabis-derived products, (iii) producing, processing, marketing, transporting or distributing prescription drugs, supplements, or food products that include Cannabis1 derived products, or (iv) providing products or services designed for, or used by, companies in the Cannabis industry, including technology, real estate or financial services.

The Fund will not invest directly in or hold ownership in any companies that engage in cannabis-related business unless permitted by national and local laws of the relevant jurisdiction, including U.S. federal and state laws. 

One of the issues I've always had with MJ are the last bullet points in the qualification criteria listed above. It casts a pretty wide net allowing the inclusion of companies that have little direct exposure to the cannabis industry or whose presence is only a minor part of their overall business. That's how companies like Scotts Miracle-Gro (SMG), Altria (MO) and Philip Morris (PM) end up in the portfolio.

MJUS has the same capability to include these names, but actually sticks mostly to more direct industry names.

MJUS Holdings

MJUS Holdings

It's not a perfect portfolio, but I believe it does a much better job of portfolio construction than MJ and that's a major step in the right direction.

MJUS's 0.75% expense ratio is identical to that of MJ, but at just $7 million in total assets so far, it's probably still a little too early for it to be investable. It's also worth noting that while MJ tracks the Prime Alternative Harvest Index, MJUS is actively managed.

MJUS vs. MSOS

Given that there are now two U.S.-focused cannabis ETFs available to investors, which one should investors choose? MSOS has been around a comparatively longer 9 months and has amassed a much larger $900 million asset base, so from a pure liquidity and investability standpoint, MSOS easily comes out ahead. The 0.74% net expense ratio of MSOS is virtually identical.

We already know that MJUS looks a lot different than MJ, not just because it focuses only on U.S. companies, but because it focuses on more active growth plays than just investing in the biggest companies, such as Tilray (TLRY) and Aurora Cannabis (ACB). MSOS takes a similar approach, which ends up producing a portfolio similar to MJUS.

MSOS Top Holdings

MSOS Top Holdings

The top 4 holdings of both ETFs are identical, although MSOS is a bit more top-heavy. All of MSOS's largest holdings also appear in MJUS. You have to go all the way down to Goodness Growth Holdings (GDNSF) to find a stock that isn't in MJUS.

While there are modest differences between the two ETFs, it's probably safe to assume that they will remain highly correlated to each other and performance is likely to be fairly similar based on the current iterations of these portfolios of course. Since both are actively managed, compositions could differ over time creating some disparity in forward returns.

Conclusion

Both MSOS and MJUS are actively managed (which I view as an advantage in the cannabis space). Their expense ratios are essentially identical. Their portfolios contain all of the same top holdings, although in varying degrees.

The only significant difference I see between the two at this point is size. MSOS at $900 million in assets holds a distinct advantage over MJUS with just $7 million in assets. Trading spreads on MJUS are more than twice that of MSOS right now, which makes it noticeably more costly to trade. As MJUS grows larger over time, I expect those spreads will come down making the two more comparable.

For now, I believe MSOS is still the better choice for U.S. cannabis market exposure.

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