MSOS vs. MJ: Which is The Better Cannabis ETF?

One focuses on U.S. companies. The other looks globally. One of these ETFs has two distinct advantages.
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Investing in the financial markets can be a rewarding experience if you invest with proper research and due diligence. With several types of ETFs to choose from, it can be complex and confusing selecting a particular ETF sector. However, cannabis ETFs have been one of the most popular investment choices for several investors lately.

This is due to the fact that the cannabis industry is one of the fastest-growing market sectors and offers several opportunities. In this article, we'll go over two of the most popular cannabis ETFs, the AdvisorShares Pure U.S. Cannabis ETF (MSOS) and the ETFMG Alternative Harvest ETF (MJ), and compare them to see which is the better investment option.

Cannabis ETFs

Investing in exchange-traded funds has several benefits of its own. Investing in ETFs ensures your capital is generally well-diversified and reduces the overall risk to your portfolio. Additionally, ETFs have lower expense ratios and also help you save on commissions and brokerage costs.

Overall, the U.S. legal cannabis market is expected to witness a CAGR of over 21% and reach over $41 Billion by 2025. Let’s go over two of the most popular cannabis ETFs that you can invest in.

ETFMG Alternative Harvest ETF (MJ)

MJ is a fund that was originally established in 2014, but became a marijuana ETF in late 2017 (prior to then this fund was the Tierra XP Latin America Real Estate ETF and focused on Latin American real estate companies). MJ tracks the Prime Alternative Harvest Index and invests in global companies targeting the global cannabis industry. These companies are engaged in the production, legal cultivation and distribution of cannabis & marijuana-based products.

This ETF is traded on the NYSE and is highly liquid. MJ is passively-managed and around 20% of its portfolio consists of tobacco stocks. Other stocks in MJ’s portfolio consist of companies that produce pesticides, fertilizers, and plant foods for the cannabis and tobacco industry. MJ has over $1.6 billion in assets with 32 holdings in its portfolio.

AdvisorShares Pure U.S. Cannabis ETF (MSOS)

MSOS is a relatively new fund that started in September 2020. It's an actively-managed fund and focuses solely on American cannabis companies that include multi-state operators. Focusing only on U.S.-based cannabis companies allows the fund to capture the huge uptrend momentum that the U.S. cannabis market is currently witnessing.

MSOS is the first and only actively-managed ETF that invests solely in U.S. based companies that operate in the cannabis industry. Since it's actively-managed, it can adapt and create investment strategies according to the market cycles. Recently, the fund surpassed the $1 billion mark in assets under management. This fund focuses on cannabis securities that are involved in agriculture, pharmaceutical, biotechnology, and other medical applications of cannabis.

Comparison Between MSOS and MJ

In order to assess which cannabis ETF is better for you, we will go over some aspects that will paint a clearer picture. These comparisons will help you understand these cannabis ETFs in a clearer way and help you make better investment decisions.

Expense Ratios

The first aspect to consider when investing in an ETF is the expense ratio. MSOS has an expense ratio of 0.74%, while MJ has an expense ratio of 0.75%. Both of these ETFs have a similar expense ratio and choosing a winner would be splitting hairs. The difference is immaterial.

Portfolio Composition & Recent Fund Performance

When we take both MSOS and MJ and compare their performance, we can get a better idea of how these funds have performed. While MSOS is a relatively new ETF, it has performed very well and delivered stellar returns in a very short period. MJ, on the other hand, is an older fund that has also shown good results. In order to compare the performance of both these funds, let’s look at the top holdings and weightings of both these ETFs.

The Top 6 Holdings of the ETFMG Alternative Harvest ETF (MJ)

  1. GW Pharmaceuticals (GWCH) - 11.3%
  2. Aphria (APHA) - 8.5%
  3. Grow Generation (GRWG) - 5.7%
  4. Tilray (TLRY) - 5.4%
  5. Canopy Growth (CGC) - 5.2%
  6. Cronos Group (CRON) - 4.5%

The Top 6 Holdings of the AdvisorShares Pure U.S. Cannabis ETF (MSOS)

  1. Trulieve Cannabis (TCNNF) - 11.0%
  2. Green Thumb Industries (GTBIF) - 11.0%
  3. Curaleaf Holdings (CURLF) - 10.9%
  4. Cresco Labs (CRLBF) - 10.1%
  5. Ayr Wellness (AYRWF) - 6.6%
  6. TerrAscend (TRSSF) - 6.2%

We can compare the performance of these ETFs from the inception of MSOS on September 1, 2020 through today and find that they've delivered roughly the same results.

Cannabis ETF Performance (MSOS vs. MJ)

Cannabis ETF Performance (MSOS vs. MJ)

So far, MSOS's focus on U.S. companies hasn't delivered outperformance, but the global economic recovery has lifted all higher risk equity boats. The greater acceptance and legalization of cannabis across the states has resulted in huge upward potential for this sector.

Global Versus Domestic Focus

When it comes to the markets that both these ETFs focus and invest in, MSOS only focuses on the U.S. cannabis market whereas MJ focuses on the global cannabis market. When it comes to which one is a better choice, MSOS has an advantage over MJ because of the wave of legalization after the U.S. elections and the fact that regulatory approvals have yet to catch up with those from around the world. With 17 states having legalized cannabis in the U.S., MSOS has the potential to grow to incredible heights as U.S.-based cannabis companies will benefit a lot from the legalization and relaxation of rules and regulations.

Conversely, MJ holds securities of various Canadian cannabis companies that are listed on U.S. stock exchanges and also focuses on other countries where cannabis is legalized. With MSOS being focused only on U.S.-based cannabis securities, I feel it has an edge. As the future seems bright for the cannabis industry in the United States, this may result in additional growth for MSOS and its holdings.

Several American multi-state operators will definitely benefit from the Biden administration’s policies regarding cannabis and its legalization. Additionally, the companies that make up the portfolio of MSOS have healthier balance sheets and stronger financials when compared to MJ and its holdings. This gives MSOS an advantage over MJ. However, the future of the cannabis industry in the U.S. largely depends on the policies and regulations that the administration brings about.

Conclusion

With the question of which is the better cannabis ETF, I feel MSOS offers a better investment opportunity when compared to MJ largely due to the fact that it is solely focused on U.S.-based cannabis securities. Its active management also provides an advantage since it's able to adjust its portfolio quickly based on changes in a rapidly developing industry.

The Biden administration will likely bring about several changes in favor of the cannabis industry and these changes could take U.S. cannabis companies to new heights and allow ETFs like MSOS to take advantage of this growth.

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