PSDN: 1st 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.

Performance

Since the launch in November 2021, AdvisorShares Poseidon Dynamic Cannabis ETF (“PSDN”) has endured an incredibly difficult trading environment for the cannabis sector as a whole. From the end of last year through the end of the first quarter of 2022, the largest ten U.S. Multi-State Operators (“MSOs”), were down an average of fifteen percent (-15%). During this same period, the S&P 500 Index was down five percent (-5%). As a note: MSOs are vertically integrated cannabis companies operating in the United States with cultivation and storefront retail operations across more than one U.S. State.

Holdings

Over the course of the first quarter of 2022, we re-constructed and focused PSDN’s portfolio to be better-aligned with a “high conviction” allocation. Thus, we shifted and narrowed the underlying portfolio stocks to consist exclusively of the largest MSOs with no cannabis focused REITs, ancillary cannabis companies or Canadian licensed producers (the equivalent of MSOs in Canada). We believe this portfolio construction provides an investor in PSDN with focused exposure to the U.S. cannabis sector. Coupled with our views on capital allocation amongst the MSOs themselves, we believe the MSOs in the PSDN portfolio are best-positioned to outperform any of the other U.S. cannabis stocks on a risk-adjusted basis over the medium- to long-term.

Uniquely, PSDN is able to employ leverage to its portfolio of up to 1.5x net assets. Our goal is to maintain leverage in the 1.20x – 1.35x range. Although it may add additional risk to the equation, the use of leverage allows an investor to potentially realize outsized returns on the upside. However, in a draw-down market for cannabis, such as the first quarter, PSDN will underperform its unleveraged peers.

Top Holdings

Ticker Security Description Portfolio Weight %
GTBIF GREEN THUMB INDUSTRIES SWAP REC 20.28%
TCNNF TRULIEVE CANNABIS SWAP REC 16.79%
VRNOF VERANO HOLDINGS CORP SWAP REC 14.30%
CURLF CURALEAF HOLDINGS INC SWAP REC 13.49%
TRSSF TERRASCEND CORP SWAP REC 13.38%
CCHWF COLUMBIA CARE INC SWAP REC 11.98%
AAWH ASCEND WELLNESS HOLDINGS SWAP REC 11.53%
CRLBF CRESCO LABS INC SWAP REC 10.55%
AYRWF REC AYR WELLNESS INC 8.86%
JUSHF JUSHI HOLDINGS INC SWAP REC 8.33%

As of 3.31.2022. Cash is not included. Subject to change.

 

Cannabis Sector Review

Returns on stocks in the cannabis sector were mainly impacted in the first quarter by four drivers: 1) macroeconomic factors and general market trends – such as rampant inflation, the Fed’s raising of interest rates and the Russian invasion of Ukraine; 2) weak fourth quarter earnings reports from the MSOs as many chose to not properly set expectations late last year, 3) investor disappointment by the lack of Federal progress on cannabis legalization; and 4) delays by the New Jersey Cannabis Regulatory Commission (“NJCRC”) to green light NJ’s adult-use cannabis program. However, The NJCRC recently allowed for several MSOs to proceed with adult-use, which could potentially provide substantial revenue to these MSOs several of which are within PSDN.

Outlook

Expectations for 2022

  • We expect the second half of 2022 to show stronger growth than the first half helped by New Jersey adult-use opening
  • Following in the footsteps of two major MSOs announcing a merger in late March, we anticipate further consolidation of MSOs and single state operators over the course of the next year
  • Any kind of Federal legislation that passes would be a significant positive for the sector, however we do not put more than a 50% chance of anything coming to fruition during the year. If any legislation did pass, we believe we are extremely well-positioned to benefit.
  • Further progress towards opening of adult-use in New York will likely occur. This revenue will likely come online in 2023 and provide substantial revenue growth for the MSOs with New York licenses.
  • We expect increasing political attention as the mid-term election cycle picks up. Cannabis polls very well across the political spectrum and is often used to garner votes. We believe the increased attention could draw renewed interest and confidence in cannabis as an emerging opportunity for investors.

Rationale for an investment in PSDN
We believe the U.S. cannabis market currently represents the single best jurisdictional opportunity to invest in the ongoing legalization of cannabis throughout the world.

Second, we believe that valuations of companies focused on the U.S. cannabis market are at a material discount to their intrinsic value. An inability for the MSOs to list on major U.S. exchanges, leading to minimal institutional investors, material price volatility on a daily basis, 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 far below those levels.

Third, we believe that the upside in the U.S. cannabis sector is something like 70-80% “Beta”* and 20-30% “Alpha.”** The Beta upside will come from both Federal and ongoing State legalization – any State legalization benefits all major players in the given State (the MSOs) and any Federal legislation that passes benefits the major players in the country (the MSOs). The Alpha, although important to the equation, will not be the primary driver to value over the medium-term. So, portfolio allocation within the MSOs matters to ultimate returns, but only to a certain extent.

For investors who agree with the above three points, we believe a long-oriented, intelligently leveraged and focused portfolio of the largest and highest quality U.S. MSOs have the potential to achieve the best risk-adjusted returns.

*Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.

**Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark is a fund’s alpha.

 

Respectfully,
 

Emily Paxhia
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager

 


Morgan Paxhia
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager

 


Tyler Greif
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager

 

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

Cannabis-Related Company Risk – Cannabis-related related companies are subject to various laws and regulations that may differ at the state/local and federal level. These laws and regulations may (i) significantly affect a cannabis-related company’s ability to secure financing, (ii) impact the market for marijuana industry sales and services, and (iii) set limitations on marijuana use, production, transportation, and storage. Cannabis-related companies may also be required to secure permits and authorizations from government agencies to cultivate or research marijuana. In addition, cannabis-related companies are subject to the risks associated with the greater agricultural industry, including changes to or trends that affect commodity prices, labor costs, weather conditions, and laws and regulations related to environmental protection, health and safety. Cannabis-related companies may also be subject to risks associated with the health care sector and the biotechnology and pharmaceutical industries. These risks include increased government regulation, the use and enforcement of intellectual property rights and patents, technological change and obsolescence, product liability lawsuits, and the risk that research and development may not necessarily lead to commercially successful products. In addition, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines, and an increased emphasis on the delivery of health care through outpatient services may affect the healthcare sector

Leverage Risk – Leverage is investment exposure that exceeds the initial amount invested. The loss on a leveraged investment may far exceed the Fund’s principal amount invested. Leverage may magnify the Fund’s gains and losses and, therefore, increase volatility. The use of leverage may result in the Fund having to liquidate holdings when it may not be advantageous to do so.

IPO Risk – The Fund may invest in securities offered in IPOs or in companies that have recently completed an IPO. The market value of IPO shares can have significant volatility due to factors such as the absence of a prior public market, unseasoned trading, a small number of shares available for trading and limited information about the issuer.

Shares are bought and sold at market price not net asset value (NAV) and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined) and do not represent the return you would receive if you traded at other times. 

The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.