Understanding Swaps and How They Affect Cash Holdings

AdvisorShares was the first U.S. ETF firm to offer investors exposure to U.S. cannabis companies working directly with our partners to ensure we are in compliance with laws and regulatory rules. Currently, due to Federal and Custodial Bank restrictions, the ETF is unable to invest in some U.S. cannabis companies directly. Over time, we do expect this to change, until then, the ETF achieves this function via a total return swap agreement with a broker (the broker is the “counterparty” to the swap agreement).

Currently, due to Federal and Custodial Bank restrictions, the ETF is unable to invest in some U.S. cannabis companies directly. Over time, we do expect this to change. Until then, the ETF gains exposure to these companies via a total return swap agreement with a broker (the broker is the “counterparty” to the swap agreement).

A total return swap is a commonly used derivative contract between two parties who exchange cash for the return from a financial asset. In our case, we are trading cash for the performance of certain public U.S. cannabis companies (e.g. Green Thumb Industries).

While the use of swaps is helpful to stay in compliance with rules and regulations, swaps create counterparty risk – the risk that the counterparty could go out of business and not be able to pay the ETF back its return or cash. To help offset some of the counterparty risk, we may retain a portion of cash as collateral by not paying for the swap in full. For the amounts we hold back as collateral, the ETF is charged a small amount of interest, and conversely, the collateral cash we hold back is typically invested in a money market fund where we earn a small amount of interest.

For example, if the portfolio manager buys $10,000,000 of exposure to Green Thumb Industries (ticker: GTBIF) via a swap, the Portfolio Manager may only post $4,000,000 to the swap counterparty, the Fund will keep the rest as collateral cash. So the Fund may show $10 million of GTBIF, $6 million cash, making the ETF look like it has more investable cash, however that cash is only collateral cash.
To determine how much investable cash the ETF has, simply take the ETF’s current AUM (assets under management) less the total value of the ETF’s equity and swap positions, and you will be able to calculate how much cash the ETF has of investable cash. The ETF is designed to be mostly invested, but will vary its cash levels to allow the Portfolio Manager to take advantage of potential alpha opportunities.

Given the current rules and regulations in the cannabis space, we believe this is the most efficient way for an ETF to invest in these companies. Over time as the rules and regulations change, we expect the ETF will invest directly into all equities in the portfolio.

For a complete list of holdings, visit the fund webpage by clicking on the respective ticker symbol.

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Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus. Please read the prospectus and summary prospectus carefully before you invest. Foreside Fund Services, LLC, Distributor.

Cannabis-Related Company Risk – Cannabis-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 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. 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.