PSDN: 4th Quarter 2022 Portfolio Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/etfs/psdn.

Since tits launch in November 2021, AdvisorShares Poseidon Dynamic Cannabis ETF (ticker: PSDN) has endured an incredibly difficult trading environment for risk assets, including the global cannabis sector. PSDN’s NAV declined 25.15% in 4Q22 and negative 80.31% in 2022. Much of the 4Q decline occurred in the final weeks of the year after the US Senate failed to introduce a much anticipated federal cannabis banking reform via the SAFE Act. Additionally, we saw the liquidation of the ETFMG 2X Daily Alternative Harvest ETF (MJXL), one of the other levered cannabis ETFs. Major indices suffered their worst year since 2008 – the S&P 500 declined -18.11% and the NASDAQ fell -33.10%.

Our portfolio composition remains focused on companies we believe exhibit fundamental quality attributes, such as scale, balance sheet, leadership, capital allocation. Due to our selection based on these qualities, the PSDN portfolio remains mainly focused on U.S. operators with close to 90% exposure, and strategically allocating to international opportunities that meet our portfolio focus. Our top holdings and weightings are noted below.

During 4Q 2022, we dynamically managed the leverage, starting the quarter with a weekly average of 1.11x and scaling it to a weekly high of 1.42x for the week ending 12/9/22. It was our intention to be near our upper leverage limit heading into the U.S. Senate’s lame duck session, when we believed we had the best probability of seeing federal banking reform introduced. The Senate failed to make any progress and we actively reduced the portfolio’s leverage as cannabis stocks aggressively sold off into the year end. We ended the week of 12/16 at 0.96x leverage and stayed there for the remainder of the year, helping to limit some of the considerable downside experienced in the market.

PSDN is able to dynamically employ leverage to its portfolio of up to 1.5x net assets. Our previously stated goal was to maintain leverage in the 1.15x – 1.25x range. We have revised this approach in the fourth quarter to more fully utilize our leverage capability in a volatile market environment, with 0.96x leverage for the remaining three weeks of 2022 and into 2023.  For the entire year, PSDN’s leverage averaged 1.20x exposure. Although it may add additional risk to the equation, use of leverage allows an investor to potentially realize outsized returns on the upside. However, in a draw-down market for cannabis, PSDN will underperform its unleveraged peers.

Top Holdings

Ticker	Security Description	Portfolio Weight %
GTBIF	GREEN THUMB INDUSTRIES SWAP REC	28.52%
CURLF	CURALEAF HOLDINGS INC SWAP REC	19.17%
AAWH	ASCEND WELLNESS HOLDINGS SWAP REC	14.91%
TCNNF	TRULIEVE CANNABIS SWAP REC	12.40%
VRNOF	VERANO HOLDINGS CORP SWAP REC	6.45%
SNDL	SNDL INC	6.33%
CRLBF	CRESCO LABS INC SWAP REC	3.72%
INCR	INTERCURE LTD	1.25%
TRSSF	TERRASCEND CORP SWAP REC	1.08%
CCHWF	COLUMBIA CARE INC SWAP REC	1.03%

As of 12.31.2022. Cash is not included. Subject to change.

The cannabis industry ended the year with a crisis of confidence. We saw pricing pressure in the U.S. and Canadian markets, while companies struggled with inflationary inputs. Further, the industry was faced with earnings estimates declines as companies and industry analysts struggled to make accurate predictions in a challenging emerging market. We saw many companies fail to make the hard choices of managing their spend, still clinging to the hope of capital markets returning sooner than later. Other companies, including some key holdings in PSDN, were very focused on managing their costs, capex plans, addressing their balance sheets, and preparing for an environment that largely does not include capital markets. We believe this is the preferred approach given the lack of federal reform in cannabis, the growing macro headwinds of declining equity markets, rising interest rates by the U.S. and other Central Banks, and a weakening consumer.

Rationale for an investment in PSDN

Despite the near term challenges and returns in 2022, we remain steadfast in our belief in cannabis as an incredible long term investment opportunity. We are often reminded of the notion that history doesn’t repeat itself, but it often rhymes. We can look back to other emerging markets, the cycles, and the good companies that prevail and thrive after periods like we saw in 2021-2022.

Second, we believe that valuations of companies focused on the U.S. cannabis market are at a material discount to their intrinsic value for several reasons. An inability for the MSOs to list on major U.S. exchanges, leading to a lack of institutional investment, material price volatility on a daily basis – lack of liquidity in the stocks, unfair Federal taxation, and a lack of clear banking regulations all justify discounted valuations to other industries, but we see MSO stock prices as trading below those levels.

Third, we believe that the upside in the U.S. cannabis sector has changed post-2022. Previously, we saw the industry approaching 70-80% “beta” and 20-30% “alpha.” The beta upside was to come from Federal reform along with ongoing state & global legalization. This beta/alpha weighting has changed given the failure of the Federal government and the duration of the tightness of capital markets. We see a likely end to the previously noted idea that a rising tide lifts all boats. The alpha, has grown in its importance in the near to medium term by trying to identify and limit the exposures to those that won’t survive and focus on those that will. The survivors are likely to see a landscape of less competition and a global industry poised to grow into the hundreds of billions by the end of this decade. Our dynamic leverage is also a potential alpha generator but we are starting the year at 0.96x and focusing more on portfolio weighting and allocation for the time being.

We have been investing in cannabis since 2014. We believe a long-oriented, intelligently managed leverage and focused portfolio of the largest and highest quality cannabis companies have the potential to achieve strong long term returns, especially while building a position through conditions as they exist today.

Respectfully,