A Terrible Way to Invest in Cannabis

Cannabis stocks are in a huge bear market that is more than 4 years old. I have been following this industry for more than 13 years after discovering in early 2013 that there were "cannabis stocks" that traded. Most seemed like penny stock scams to me, including the first one that I analyzed for my readers on Seeking Alpha, where I was a popular contributor. That stock was Medical Marijuana, Inc. (MJNA), which I called out in my first article ever on cannabis stocks, Reefer Madness: Pot Stocks In A Bubble. Here is the endings of that article.

The 11 stocks discussed are all tiny businesses with little or no operating history, limited information and no institutional support. These stocks are all speculation, and most likely not even reasonable speculation. My purpose in sharing this article is to remind investors that fundamentals matter. Don't make the same mistakes that "investors" have made time and time again in betting on hype and emotion.

There are some tremendously negative stories associated with these 11 penny stocks, but that is not why I am writing today. I was so happy to see the sector evolve in so many ways, but I have remained cautious this entire time, especially when sentiment is overly strong (like it was in early 2021!).

One of the most popular cannabis investments is the AdvisorShares Pure US Cannabis ETF (MSOS), which trades on the NYSE Arca Exchange. I liked it a lot when it came out  in late 2020, which was right before the peak in cannabis stocks, but I developed a big aversion to it. I think that AdvisorShares has been horrible in many regards. I have been calling them out for years now, though the problems aren't entirely theirs. No, the problems with MSOS can be blamed on traders and investors too.

The Problems with MSOS

One of the problems for this ETF is that it is too focused. I often warn investors in my articles published by Seeking Alpha and at the 420 Investor subscription service that I run that cannabis investing needs to be broad, as there are several sub-sectors in that market. I also have discussed this in the weekly newsletters that I publish at New Cannabis Ventures.

At New Cannabis Ventures and even before it, I have been sharing what is called the Global Cannabis Stock Index, which currently has 23 members. It was last rebalanced on 3/31, and was equal-weighted for all of the companies that qualified. As of 4/11, it was 39% Ancillary Companies, 27% Canadian LPs and 25% MSOs (American cannabis growers and/or sellers). The other areas include a Canadian retailer and a biotech company. I have no objection to MSOS focusing on MSOs, but I am concerned that its buyers could miss out on other parts of the market if MSOS is all that they own for cannabis exposure.

MSOS didn't always focus on MSOs exclusively, but now it does. There are currently 23 holdings, and the Top 3 represent 69% of the ETF. This is atrocious! I own none of these three in my model portfolio that I share with subscribers of my 420 Investor service. If one adds in the other two large MSOs (that I do include in the model portfolio), MSOS has 82% exposure. While these are the largest MSOs, their market caps or revenue are not even close to 82 of the market. So, MSOS is overly concentrated.

The other issue that I have with MSOS is that it is not actively managed, as its literature maintains is the case. There is no index, and, after watching this for over four years, I can say that the ETF rarely makes changes. It is nice that it shares its holdings on a daily basis, but the changes the fund makes seem overwhelmingly tied to inflows and outflows rather than repositioning securities.

Tying these two observations together, one can see a big risk: If MSOS continues to have redemptions, it will have to sell the very large MSOs. What do I mean by "if MSOS continues?" Well, while its shares outstanding has increased by 2.0% so far in 2025, this is down from 4.8% in early February. The shares outstanding have decreased by 2.7%. This is not the first time either, as shares fell in late 2022 into 2023 by more than 13% before increasing again.

MSOS has been a disaster after a huge early triumph. Here is the chart since inception:

It is down 91% since inception and 96% since the peak. I like the idea of "buy low", but this could go lower.

Alternatives to MSOS

I understand that many investors and traders can't invest in cannabis unless it is through an ETF or fund. I wish I had more confidence in competitors, but I am hard-pressed to confidently recommend an alternative ETF. One that I do like instead of MSOS is Amplify Seymour Cannabis ETF (CNBS). I wrote about this on Seeking Alpha recently, initiating coverage with a Buy rating. It has less concentration than MSOS, and it has a real portfolio manager with good experience.

For those who can buy OTC stocks like MSOS owns, I suggest buying the stocks directly. While I would avoid the three largest ones it owns, at least for now, those who build a portfolio themselves will save the management fee.

As I shared above, there are alternatives to MSOs. In my model portfolio at 420 Investor, I currently hold 7 cannabis stocks. I follow closely 21 cannabis stocks now, having dropped 2 this year. I wrote up my entire Focus List four months ago, discussing my views on each of the names.

My goal with this model portfolio is to beat the Global Cannabis Stock Index. I have exposure to 3 Canadian LPs that represent 58% of the model portfolio, which is quite overexposed. While it's not my largest position, Tilray Brands (TLRY), which was a stock I really did not like at all for a long time, is a good alternative to MSOS in my view. The other two are Organigram (OGI) and Village Farms (VFF). I have written about each of these at Seeking Alpha. They are all down less than MSOS over the past year:

I am a bit concerned with some Ancillary Companies, but one that I like is GrowGeneration (GRWG). I wrote negatively about this company when it was much higher, but I like the stock now. GRWG has no debt (and decent cash), and it trades below tangible book value. For those who think the American cannabis industry will do better, GRWG will go up, if so. Sure, MSOs are cheap and leveraged to the end of 280E taxation (if that happens), but they are quite risky if 280E remains.

Conclusion

While I am suggesting selling or avoiding a big cannabis ETF, I am not against investing in cannabis stocks at all. When I criticized the publicly-traded stocks in early 2013, many accused me of being against the industry or the products or being paid off by Big Tobacco, Big Alcohol or Big Pharma. I don't take money to say bad things or good things!

I think that we are in a bear market overall, and I do worry about how cannabis stocks will hold up, if this is the case. For those who want to invest in the industry, MSOS is not a good way to do so. I have shared some alternatives. If you own MSOS, you should sell it and replace it with one of them. If you are trying to buy the dip, explore these alternatives as well.

While I have a lot of caution about the cannabis industry, I remain very dedicated to serving its investors. If you have any questions, ask here or ask on one of my blogs at Seeking Alpha, which is open to the public.