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.

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

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

• 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.