The pure-play marijuana ETF that just keeps growing: Jason Wilson on MJ and the cannabis stock market
By Brandon A. Dorfman
Oct 11, 2018
While change itself may be cliché these days, the profoundly transformative nature of the cannabis industry is anything but, making it one of the most highly sought out markets by investors and entrepreneurs alike. In fact, it’s that hunger that saw The ETFMG Alternative Harvest ETF (MJ) grow from $5.6 million AUM to nearly $700 million in under a year. After all, in an age where everything’s already been done, it’s rare to have an opportunity to join an opening on the ground floor.
The ETFMG Alternative Harvest ETF, or MJ, which tracks a market-cap-weighted index of global firms engaged in the legal cultivation, production, marketing or distribution of, for the most part, medical cannabis and its related products is the only pure-play cannabis ETF fund in the U.S. Consisting of 39 stocks, the top 10 of which are cannabis companies that constitute 62 percent of its holdings, it’s been one of the fastest growing funds of 2018, a testament to both its management and the palpable excitement for all things cannabis.
Jason Wilson, the president of Budding Equity Asset Management Inc. and partner in MJ, has been there since the beginning —and his excitement for the fund shows. “It’s by far the best way to play this space,” he said when he took some time recently to speak with PotNetwork about the fund. “It’s a sector play. It’s the only real liquid option in the U.S. markets, and it’s in an industry where it’s really hard to pick winners and losers right now.”
PotNetwork spoke with Jason to find out what makes MJ, in his words, the best play on the market today, to learn more about what makes the cannabis industry so transformative, and to see if we can’t figure out what’s going on with Tilray.
Tell us a little bit about your background in investing and how you came to be involved in the cannabis space?
I’ve been in the capital market, asset management space for about 20 years. Originally by trade, I’m a corporate M&A lawyer with a securities and financing background. I moved over to CIBC World Markets, ended up going down to New York. I worked at Société Générale for about four years and then I ended up going to a regional broker-dealer called Incapital, in Florida, to help them build out an asset management structured product arm.
I decided to come back to Canada about four years ago, and I ended up selling our Canadian operations to a firm called INFOR Financial Group. I ended up working with them on various mandates, a number of [which were]cannabis producers looking to raise capital. We just saw a lot of folks looking for money and a lot of interest in the space but really no one filling the gaps. It really created a good opportunity for more independent firms, and that’s when we decided to create Budding Equity.
And, of course, Budding Equity is —we’ll call it your day job. Tell us all about that and what your mission is there.
Our focus in Budding Equity, we initially founded it in 2015, was twofold. First off, we have a licensing arm. And in that regard, what we do is we work with major global brands to help them monetize their IP. I’ll give you two examples. We have a deal – we have a global license with Paramount regarding Up in Smoke.
Another example is, we have a joint venture with Kevin Smith and Jason Mewes, Jay and Silent Bob, specific to their IP. So we’re working with them, and we’ve put a couple of deals in place, one’s public already, there’s another one coming out that you’ll see in the next little while, where we’re helping them, again, put various licensing agreements in place with accessory companies with producers. So that’s the licensing side of our business and we’ve been doing that for over three years now.
On the other side, between the capital markets background, investment banking, understanding the asset management space and then, obviously, doing a really deep dive in the cannabis space, and being in Canada, we took advantage of that to create a consulting arm that really focused on asset managers. There’s so many institutional investors, mutual funds, ETFs, that want to understand the space better but there’s just no expertise out there. I think anyone that tells you that they are an expert is lying or they're foolish. One of the groups that we worked very closely with resulted in MJ which, in my opinion, is by far the best way to play this space. It’s a sector play. It’s the only real liquid option in the U.S. markets and it’s in an industry where it’s really hard to pick winners and losers right now. So that’s kind of how we got from A to B over the last 20 years.
Let me ask you about the ETF because the fund’s created a lot of buzz here as it’s the only U.S.-based cannabis ETF. It’s grown from $5.6 million in assets to well over $500 million over the past year. Can you talk about how the fund’s kind of taken advantage of the excitement among investors?
We launched —I believe it was December 26th, was our first day last year. It is listed on the NYSE under MJ. We ended up converting a Latin American real estate REIT into what is now MJ. So when we did that conversion, there were — I think it was $6 million of assets in the fund. In the first few weeks after the conversion, we did get up to a few hundred million and closer to the over $400 million range in, we’ll call it, the first month. There was a lot of initial demand for this product —a lot of pent-up demand. There’s not too many new ETFs that come out that bring $400 million of new assets in, in their first three or four weeks, especially over a relatively quiet time, it was right after New Year’s.
From there, two things kind of happened. Number one was, they rescinded the Cole Memo. That kind of put a bit of a damper on what might happen in the states. There [were] question marks in Canada about, if it was going to be legal, but when? So, we kind of hovered in that range for five or six months, and then a bunch of things started happening. There’s just been so much positive news. Granted, some folks have been worried about valuations to some extent but I think what started happening in the last month to two months is just a realization that this just isn’t a backyard product. This just isn’t a bunch of kids in Oregon growing some cheap weed. This is actually becoming a mainstream industry.
Exactly, the past couple of month alone have been some of the most exciting in the market.
Some of the first things that happened were Constellation Brands. Suddenly, here comes Goldman Sachs advising, Merrill Lynch financing, a $4 billion further acquisition. And that really set of the catalyst of things to come. We also have FDA approval of GW Pharma’s Epidiolex, right? You have a kid that’s under two years old that’s suffering from 100 to 200 seizures a day, and they can get Epidiolex and, in many cases, completely remove those seizures. And, if not, in the vast majority of times it brings them well under control to something manageable, right? So that’s a very tangible product that just adds a lot of value to human society, period.
And now we’re seeing, in addition to that and I think in light of that, the DEA softening up and saying, let’s allow Tilray to import medical grade cannabis to the University of California San Diego, to their marijuana medical research center. It seems like a little bit of a lifting of a veil, so to speak, to allow true university medical research to happen here. On the recreational side, this is an acknowledgment by major an alcohol brands company saying that this space is going to cannibalize my space in Canada. We know that Stats Canada, that there’s at least $6.5 billion dollars’ worth of annual sales of cannabis in Canada that we know of that’s not yet recreationally legal. Maybe some of these companies got ahead of themselves, but there’s a lot of them that are very well managed, very well capitalized, very sophisticated that now have institutional backing, that are going to take advantage of this over the next decade or so. I think that’s what’s driven all the attention into our fund, and it’s the only one-stop shop in town to take advantage of this.
I have to ask you about Tilray. With everything that’s gone on with Tilray recently, outside of simply asking you what the hell’s going on with that stock right now — what the hell is going on with that stock right now? Is it just a bunch of FOMO investors who don’t know what they’re doing? How does this one company come out of nowhere and kind of throw off the whole sector?
Tilray’s been around for a while, I mean, they’re not new. When they went public, they did it in a manner by going public on a U.S. exchange that has been starved for this kind of deal. As a Canadian investor, we’ve had these stocks in the CSC and TSX for years, and everyone here has seen, you know, cannabis go from a $300 million company to a $1 billion company, to a $15 billion company and they’ve had access to that the whole way along. Suddenly, Tilray actually says, “We’re an IPO but we’re going to list – actually, our primary listing is going to be on the NASDAQ.” And now, you have tenfold retail investors that can finally take advantage of this, is number one. Number two, they have a horribly constrained flow. Only 13 percent of their shares are tradeable.
A lot of demand on a limited slope creates some price distortions. Tilray came out at $17. It quickly popped up. There were some institutional investors that were borrowing and shorting it. Because they’re like, “This doesn’t make sense. These guys should be trading at $60, $80 a share, why are they at $100, $120.” But when that retail contingent of investors keeps coming in and piling on, they had to start covering their shorts. I mean, a bit of a short squeeze happened. I think it was a little bit of a perfect storm and it’s unfortunate, someone bought a share at $300. This firm’s been around for years, it has a good chunk of capital in it. They have international export agreements, it’s not a fluke that they were the one that got the import license through the DEA. I mean, they know what they’re doing.
It’s put a lot of volatility in the sector. I’ve got to give the ETF Managers Group that credit, and all the APs that work in our fund. Like, with the creation-redemption process, and how that works, where the APs have to actually go buy our constituent and our basket shares, and there’s all this madness going on? The guys have done a great job with it. I know we’re a big fund of about $650 million but to have stocks like that go from $1 billion valuation to, at its peak, $20 billion, it’s just nutty.
On the other hand, short sellers seem to be attacking the cannabis market pretty hard recently, and they’re losing a lot of money. Do they know something about the sector that we don’t?
I think there were a lot of short sellers coming out saying, “Hey, some of these valuations are getting a little bit out of hand. Let’s go and let’s try to take advantage of that.” But the problem is, when that goes the wrong way on them and they have to close out those positions or suffer material losses, that again just keeps propelling it upward if you’ve got more buyers filling all those shorts, closing out all those short positions.
It’s another example, in this industry, of why you have to kind of just take a stand back, long-term sector play on it. To try to pick winners and try to pick losers. It’s like the old adage, in a falling market, it’s hard to catch a falling knife without cutting your finger off. There’s so much macro development right now, I don’t know why people are even trying to focus too much on the micro development. I really don’t see, in the public market, how you can say, “Here’s going to be a winner, there's going to be a loser.” You have to embrace the fact that the sector is going to grow in so many ways and in more than just recreational use, more than just pure medical, you know, leaf-based marijuana. This is transcending to – it’s going to cannibalize the pharmaceuticals to some extent.
We can talk about what CBD and other related cannabinoids do for epilepsy. But I think if you look at the pharmaceutical market, [it] is huge. In the intoxicants market, it’s not just about introducing, “Oh, I can vape or I can roll a joint.” This is going to be people who are saying, “I don’t really want a beer. I want something that’s lighter, [and] maybe it has a wellness benefit too because it’s also helping me regulate my blood pressure.” There’s an opportunity to kind of disrupt not just the pharmaceutical industry but also into the alcohol industry as well. Canopy is actually running clinical trials on the efficacy of cannabis for pets, and a lot of people have their pets on different medications as well. As crazy as it sounds, it’s even moving into that market.
In other words, what you’re saying is that the industry could look completely different in the next few years as things evolve, hence it’s almost impossible to pick winners and losers today?
As it grows and as things happen —what’s going to happen with the waste, with the fibers, and all that? We know marijuana and hemp are the same thing, other than one’s male and one’s female. There’s going to be an industrial application for even waste in this product. How it’s going to mature, where it’s going to go. The market is not just people buying weed to smoke it, it’s going to be all these other things, and it’s going global. There’s already 34 countries globally, now, that have legalized marijuana for medical use.
I don’t know how you can pick winners at this point. And who knows what happens with the STATES act, if that’s enforced, and how that’s going to roll out for Canadian licensed producers. A lot of them have options to buy a ton of warehouse or greenhouse space down in the U.S.; some don’t, right? Like, there’s just so many ways this could all go. I think you need to focus on the sector and not on the individuals.
Finally, is there anything you think investors need to understand about the industry that they don't right now because it’s so young and volatile at this point?
Generally, overall, it’s just a fascinating industry and we’re incredibly lucky to be a part of this, and it’s almost a once in a lifetime opportunity. This is a new industry, it’s a legalization opportunity, right, it’s coming off of prohibition. It’s not just a U.S. [or] Canada-type movement, it’s a global movement. And so to have, as investors, the opportunity to live through this, to learn from it, to participate in it, has been incredible. And to be able to work with – I have to say this is – to get MJ out with the team at the ETF Managers Group, they’ve just been tremendous to work with, it’s been a lot of fun. So, you know, we’ve had a lot of fun to date, we’ve had a lot of success to date, there’s a heck of a lot more to come for everyone and I think for those that are patient in the space it will be a good, long ride.