ETF Prime: Active Management, Cannabis, and More

Rosenbluth explains that for the first quarter of 2022, active ETFs made up around 4% of the ETF marketplace but brought in 11% of the net inflows, carving out almost triple their market share. The pair discuss the appearances of Cathie Wood at the recent ETF Exchange conference in Miami Beach, FL, last week and her explanation and defense of ARK’s investment approach and thesis for their flagship fund, the ARK Innovation Fund (ARKK B+).

Geraci believes that the way forward for active funds is in the more targeted, concentrated approach that ARKK and funds like the Davis Select U.S. Equity ETF (DUSA C)* take.

“I agree with you that there’s room for growth within the concentrated portfolio approach; those advisors looking to add some sizzle onto a core portfolio that maybe is passively managed with three basis-point S&P 500 Index-based products,” Rosenbluth says. “You want something more concentrated; you want that conviction.”

More issuers and firms are increasingly looking to launch active ETFs this year, and Rosenbluth believes it will lead to an even greater number of choices but that issuers will need to make their strategies and convictions work to justify the higher premiums. In an informal poll that Geraci conducted, over 60% of respondents reported that they wanted some form of active management either within equities, fixed income, or both, highlighting the interest in current market environments.

Switching to discuss cannabis funds, Rosenbluth explains that despite lagging by over 1,000 basis points, the AdvisorShares Pure U.S. Cannabis ETF (MSOS ) has experienced net inflows and interest from investors.

“There’s no lack of supply of products,” Rosenbluth says, speaking to the numerous cannabis funds available currently. Instead, the question becomes, “Is there enough demand to meet investors where they are?”

Next is Morgan Paxhia, co-founder and managing director of Poseidon Asset Management, to talk about Poseidon’s entrance into cannabis investing. Poseidon was the first to launch a cannabis ETF, the AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN).

“We’re on a great trajectory as an industry, and her vision is amazing that she saw that, and together we’ve executed on quite a bit, and I feel like we’re still just getting started as an industry,” Paxhia says.

PSDN is actively managed and seeks to provide access for retail investors all the way to institutional to the cannabis marketplace and its growth potential. The fund is leveraged and utilizes swaps, a unique approach to investing according to Paxhia, which will be increasingly more useful once the cannabis market moves beyond the bear market it has been in as increasingly more states open up laws for cannabis use.

Last on is David Miller, co-founder and CIO of Strategy Shares, to discuss the Strategy Shares Nasdaq 7HANDL Index ETF (HNDL), which targets a 7% annualized distribution yield. The fund does this through a fixed allocation core portfolio split half between equity exposure and a half between bonds to give what Strategy Shares believes is the best risk-adjusted returns.

“The big problem with 60/40 is when you run into one of these years where equities get slammed but bonds fly, kind of like in 2008 or March 2020 period, you quickly realize that your 60% equities and equities are twice as volatile as bonds, that’s actually a portfolio that’s about 80% equity risk,” Miller explains.

The other half of the portfolio is done through Nasdaq and Dorsey Wright, which utilizes tactical models to perform well in various environments. The fund focuses on risk-adjusted returns over time while seeking to provide a 7% yield.

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