Why a US cannabis CEO is at war with an ETF manager

When the AdvisorShares Pure US Cannabis ETF first launched in 2020, Green Thumb Industries CEO Ben Kovler thanked the firm for including his company in the basket, calling it “a win to me.”

Now, more than four years later, the mood in the cannabis industry is less cheery. The ETF, which uses the ticker symbol MSOS, is down 84% since its debut as the potential for federal weed reform stagnates and a debt crisis for companies in the industry looms. 

Kovler doesn’t seem to think being part of MSOS is a win anymore. Last week, he publicly accused AdvisorShares of contributing to Green Thumb’s low stock price and called for MSOS to coordinate with the company to help mitigate the negative impact that outflows from the fund can have on his shares.

“With all due respect, what is your fiduciary duty here?” Kovler asked AdvisorShares CEO Noah Hamman on X on March 13. “Is it a duty of care or loyalty to the long term holders of your product or is it simply to check the boxes & clip your fees?”

Kovler and Green Thumb did not respond to several requests for comment. Hamman told Sherwood News that “the ETF doesn’t move or make those prices; the valuation of the ETF is simply a sum of its parts.”

Unlike Canadian cannabis companies like Tilray, Canopy Growth, or SNDL Inc., any company that grows or sells weed in the US cannot list on major exchanges. Instead, they trade on over-the-counter markets, which have less liquidity and are more vulnerable to fraud, ultimately reducing their potential investor base.

AdvisorShares debuted the ETF with the goal of giving investors a convenient way to gain exposure to the US cannabis market. MSOS is able to list on the New York Stock Exchange because it does not directly hold the stocks; it holds derivatives. At its peak in February 2021, the fund’s assets nearly eclipsed $1.3 billion. That figure is now down to about $370 million. 

Though similar funds have followed MSOS’s lead, it remains the largest fund of its kind and indirectly holds large stakes in major cannabis operators, including roughly 10% of Green Thumb.

MSOS was initially welcomed by the industry, which saw it as a way to get more investors exposed to their companies. At the time, hopes for federal reform were high and valuations were rising. But now morale and share prices are plummeting, making it little wonder why pockets of discontent have emerged among investors and executives. 

From Kovler’s perspective, MSOS might now be more of a driver in the market rather than just a participant — a case of the tail wagging the dog.

“What if your product was creating the underlying movement?” Kovler asked Hamman on X on March 14. Kovler clarified that he didn’t think the ETF was responsible for his stock falling, but said “the action in the sector since the election has been exaggerated by the etf.”

Green Thumb is currently in the process of a $50 million stock buyback program, and Kovler told Hamman on X that he would prefer the ETF call him when it has shares to offload. Hamman said its priority is getting the best price.

“To tell us we need to call him every time there’s a redemption in the fund is weird and unusual,” Hamman told Sherwood.  

Why buy MSOS?

On a February 26 earnings call, Green Thumb reported revenues and earnings that beat expectations, but Kovler told analysts, “You would not know it looking at the stock price, which is hovering at a 52-week low.”

One factor potentially fueling Kovler’s frustration is that Green Thumb is more profitable than its peers, but its stock price doesn’t trade at a significant premium. If this were a company in any other industry, trading on a major exchange and benefiting from high institutional ownership, you’d expect to see superior operating performance reflected by a higher valuation. But cannabis companies more often trade off sector-wide trends versus a specific company’s fundamentals.

Most professional investors in cannabis, several of whom were interviewed for this story but asked not to be named, say AdvisorShares isn’t doing anything nefarious but that MSOS is also no better an investment than directly owning the companies that make up the bulk of its basket. Its value is that it’s convenient and liquid, not that it performs particularly well. 

Investors also fear that MSOS could one day get a large number of outflows, forcing it to offload its exposure, which would drag down stock prices as its swap provider sells off, given the low liquidity in the market. It did see some outflows after Kovler’s allegations, but its shares outstanding remain high even as the price has fallen. Kovler has previously questioned how many of those shareholders are “real” vs. “AI.”

MSOS is very heavily weighted on the largest companies, not all of which have sparkling fundamentals, to say the least. Green Thumb makes up 33.4% of MSOS’s holdings. Just three companies — Green Thumb, Trulieve, and Curaleaf — compose more than 75% of the ETF’s basket. 

Since only a handful of companies in the space are on decent financial footing, any ETF purporting to provide broad exposure to the US cannabis market is going to have “dead weight” in it, a partner at a cannabis investment firm said. Another investor said AdvisorShares is forced to “buy shit and mix it into the chocolate.”

Alan Brochstein, an investor and blogger at New Cannabis Ventures, is more critical. He said AdvisorShares could manage the fund in a way that exposes them to better-quality companies. 

“If they were proving themselves to be good active investors then you wouldn’t want to just buy their top stocks and hold them, because you’d miss out on their active management,” he said. “They have no active management.”