Marijuana may soon be reclassified as a Schedule III drug, and the news has sent cannabis ETFs, ahem, higher.
The Trump administration’s potentially friendlier stance on bud follows a similar initiative to downgrade the drug from its current schedule I status, which was ultimately vaporized during the Biden administration. The likely rescheduling would mean more medical research into cannabinoids and, crucially for an industry operating in a legal gray area, could dramatically reduce taxes.
“There are some pretty significant financial implications,” said Christian Magoon, CEO of Amplify ETF. For example, companies that handle Schedule I drugs cannot write off business expenses, which significantly reduces profitability, he said. Additionally, “a rescheduling begins that will likely open up banking for many of these companies,” as many of the largest financial institutions have avoided serving the companies for legal reasons.
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US cannabis ETFs primarily use swaps rather than holding marijuana stocks directly. There are only a few cannabis-focused ETFs on the market:
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The largest is the $1 billion AdvisorShares Pure US Cannabis ETF (MSOS), followed by the $193 million Amplify Alternative Harvest ETF (MJ), VettaFi data shows.
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Like other ETFs in the small category, MSOS is up about 77% in five days, putting its year-to-date appreciation at 62%.
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Still, in November 2021 it was 420% higher than its current price of $6.50, and is below its high of $52 in February of that year. (See what we did there?)
MSOS, for example, has direct exposure to two US cannabis companies (Curaleaf Holdings and TerrAscend Corp.). An outcome of the drug’s rescheduling could mean more U.S. listings and the ability to maintain them, said Mackenzie Peterson, vice president of marketing at AdvisorShares. “People have been waiting for a rescheduling for a long time and it’s a catalyst we need,” he said, adding that the firm will likely continue to use swaps to increase its exposure to certain stocks in its ETF portfolios.
To be frank: It is a very volatile category due to political uncertainty around legalization. The latest news is driving prices up quickly, but they could drop just as quickly. A side benefit of reclassifying the drug is that more states could work to legalize it, as some have been hoping to do, Peterson said. And the push for medicinal use with a Schedule III classification may mean that small cannabis businesses suddenly become more valuable, Magoon said. “Now it’s making them available to consumer app companies to be acquisition targets.”
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