Last updated on February 11th, 2022 , 09:22 am
The investment firm Poseidon recently teamed up with AdvisorShares to launch a new leveraged cannabis ETF: the AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN).
What makes this ETF stand out in comparison to other cannabis funds is its leverage. By using swaps and derivatives, PSDN aims to apply moderate levels of leverage on up to 150% of the portfolio’s assets. This leverage will inevitably lead to more volatility. Therefore, PSDN is better suited for very bullish investors with higher risk tolerance.
Should this leveraged ETF find a home in your portfolio? For your review, projectfinance has dissected the fund’s prospectus.
TAKEAWAYS
- PSDN invests in the cannabis and hemp industry
- The fund is actively managed, making it more agile to market changes
- Because of its active management style, PSDN charges a high expense ratio of 0.92%
- PSDN is well diversified, investing in cannabis sub-sectors which include software tech, biotechnology, pharma, internet enabled devices and agriculture
- PSDN will also seek opportunities from both IPOs and mergers in the cannabis space
- PSDN leverages its portfolio by trading derivatives, including “swaps”
PSDN: Expense Ratio
The first thing I look at before investing in a fund is the expense ratio. Over the past few years, the fees that exchange-traded funds (ETFs) charge have been drastically decreasing.
So what does AdvisorShares/Poseidon’s PSDN charge? I found it tucked away in the bottom corner of the fund’s information page.
- Management Fee: 0.80%
- Other Expenses: 0.12%
- Net Expense Ratio: 0.92%
The net expense ratio for PSDN is 0.92%, twice as high as the average ETF fee of 0.40%. Why do they charge so much?
Leveraged ETFs require more maintenance than passively managed funds. Because of this work that must be performed, the expense ratios on such funds are generally high. PSDN’s net fee of 0.92%, however, is extremely high.
As this ETF is brand new, we must allow some time to see if the funds performance merits such a high fee.
PSDN: Investment Strategy
The “fund objective” of PSDN is rather generic, stating they simply wish to seek, “long-term capital appreciation”.
The fund’s investment strategy, however, gives us a better idea of its unique approach.
PSDN is not, therefore, a pure cannabis play. The companies in which they invest must make half of their money from marijuana and hemp. Where does the other half come from?
What will make this fund attractive to most investors is the second part of their investment strategy: investing in derivatives. Let’s take a closer look at that next.
PSDN: Leverage Utilized
What differentiates PSDN from other popular cannabis ETFs (like CNBS and YOLO) is their proposed use of leverage.
There is little information on what derivative instruments, exactly, the fund plans on utilizing to gain this leveraged exposure. PSDN’s prospectus states that “total return swaps” will be included.
Swaps are like options contracts and futures in that they are both derivatives, but that’s where their similarities end.
- Swaps are customized derivatives that trade in the over-the-counter (OTC) market
- Options and futures are standardized securities that trade on public exchanges
Unlike options, swaps are private agreements between parties. Though many types of swaps are indeed regulated by the government, counterparty risk is still present. The risk with swaps is that one party may not follow through on the prearranged agreement.
PSDN: Market Sectors
The PSDN ETF includes a large range of sectors within the cannabis industry. Below are a few of the sectors on the radar of Poseidon/AdvisorShares’ fund:
- 1. Agriculture
- 2. Biotechnology
- 3. Pharmaceuticals
- 4. Real Estate
- 5. Finance
PSDN: Top Ten Stocks
Poseidon’s PSDN fund currently owns around 30 stocks. This is not a very well-diversified ETF.
Additionally, the top-ten holdings comprise more than 70% of the fund’s value. Note the first security on the list: GREEN THUMB INDUSTRIES SWAP REC.
If you’re able to find out what, exactly, this represents, please let me know!
PSDN: Top 10 Holdings
| Company/Security | Portfolio Weight |
|---|---|
|
GREEN THUMB INDUSTRIES SWAP REC |
12.19%
|
|
REC AYR WELLNESS INC |
8.51% |
|
VERANO HOLDINGS CORP SWAP REC |
8.31% |
|
TRULIEVE CANNABIS SWAP REC |
8.09% |
|
ASCEND WELLNESS HOLDINGS SWAP REC |
8.08% |
|
CRESCO LABS INC SWAP REC |
6.86% |
|
WM TECHNOLOGY INC |
5.92% |
|
CURALEAF HOLDINGS INC SWAP REC |
5% |
|
JUSHI HOLDINGS INC SWAP REC |
5.40% |
|
PLANET 13 HOLDINGS SWAP REC |
5.02% |
data from advisorshares
Cannabis Stocks vs S&P 500
So how does the cannabis industry stack up to the S&P 500?
If you’re going to be investing in an ETF, you’d hope that ETF has been outperforming the market -particularly when there is leverage involved.
The below image compares the one-year performance of AdvisorShares’s YOLO Cannabis ETF (blue) with the SPDR S&P 500 Trust ETF (gold).
SPY vs YOLO
Chart from Google Finance
Although cannabis stocks began the past year with a roar, they have since quieted down. A lot. The S&P 500 has easily outperformed the cannabis industry as a whole in 2021. And in 2022? Who knows what will happen.
However, I’m not sure I would want to own a non-leveraged cannabis ETF in this presently under-performing sector!
Final Word
Getting involved with leveraged securities can be a dangerous game. If you don’t understand completely what comprises a product, it is probably best to stay away. Swaps and derivatives can blow up fast. I’ve learned the hard way!
I’ll leave you with this advice.
Years ago, I was thinking about buying a cafe (I know nothing about restaurants).
I asked a restaurateur friend what his thoughts were.
“If you have to ask what you’re getting involved with,” he replied, “the restaurant business isn’t for you.”
With that being said, if you truly want to learn more about leveraged ETFs, check out our video below!
