Cannabis ETFs Stay High on Drug Rescheduling News

Marijuana may soon be reclassified as a schedule III drug, and the news has pushed 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 eventually vaporized during the Biden administration. The likely rescheduling would mean more medical research for cannabinoids, and crucially for an industry operating in a gray legal area, it could dramatically reduce taxes. 

“There are some pretty big financial implications,” said Christian Magoon, CEO of Amplify ETFs. For example, companies that handle schedule I drugs can’t write off business expenses, which significantly reduces profitability, he said. Additionally, “a rescheduling starts to probably open up banking activities for many of these companies,” as many of the biggest financial institutions have avoided serving the businesses for legal reasons.

And the Green Grass Grew All Around

US cannabis ETFs primarily use swaps rather than holding marijuana stocks directly. There are only a few cannabis-focused ETFs on the market:

•  The largest is the $1 billion AdvisorShares Pure US Cannabis ETF (MSOS), followed by the $193 million Amplify’s Alternative Harvest ETF (MJ), data from VettaFi show. 
• Similar to other ETFs in the small category, MSOS is up by about 77% over five days, putting its year-to-date appreciation at 62%. 
• Still, it was 420% higher in November 2021 than its current price of $6.50, and it’s down from its peak of $52 in February of that year. (See what we did there?)

MSOS, for example, has direct exposure to two US cannabis businesses (Curaleaf Holdings and TerrAscend Corp.). A result of the drug’s rescheduling could mean more US listings and the ability to hold them, said Mackenzie Peterson, vice president of marketing at AdvisorShares. “People have been waiting for rescheduling for a long time, and it is a catalyst we need,” she said, adding that the firm will likely continue to use swaps to increase its exposure to certain stocks in its ETFs’ portfolios.

To Be Blunt: It’s a highly volatile category due to the political uncertainty around legalization. The latest news is pushing up prices quickly, but they could fall just as fast. A secondary benefit to rescheduling the drug is that more states may work to legalize it, as some have been waiting to do, Peterson said. And the boost for medicinal use with a schedule III classification may mean that small cannabis companies suddenly become more valuable, Magoon said. “It now makes them available to be acquisition targets for consumer application companies.”