Foothill Transforms Cannabis Mutual Fund to ETF

The fully transparent, actively managed ETF will track the same investment objective and follow the same rules as the former mutual fund. 

However, it will possess a lower expense ratio. BUDX will charge 0.79% in total annual operating expenses, applied after a fee waiver that will remain in place until 2031. In contrast, Investor Class shares of the CANIX mutual fund had cost 1.32%, according to the most recent annual report.

BUDX will invest in companies of at least $100 million in capitalization that are engaged in legal cannabis-related businesses, which the fund’s prospectus splits into eight categories: agricultural technology, ancillary products and services, biotechnology, cannabis products and extracts, consulting services, consumption devices, cultivation and retail, and industrial hemp.

Companies are considered to be “cannabis companies” if at least 50% of their revenue comes from one or more of these categories.

The fund also has wide flexibility to invest in other instruments, such as foreign securities, REITs, options, and more. The prospectus also notes that the fund may own shares of other cannabis ETFs — including those that use total return swaps to obtain exposure to securities without owning the company in question. 

This could include multistate operators (MSOs), which are U.S.-based companies engaged in cultivation, production, and/or distribution of marijuana inside the U.S. For example, as of the end of the second quarter, the Cannabis Growth Fund held a chunk of its portfolio in call options on the AdvisorShares Pure US Cannabis ETF (MSOS).

The fund will be actively managed, which will be a key differentiator, said Korey Bauer, chief investment officer for Foothill Capital Management and portfolio manager of the cannabis fund. 

“Cannabis is a fast-moving space, and we think active management is important, from both an opportunity and a risk management standpoint,” Bauer said. “Many indexes have to just ride things out, but we can stay nimble.”

To select securities, the fund’s managers will rely on a proprietary screening process that evaluates each company’s liquidity, long-term growth potential, price momentum, financial viability, branding and market exposure, and management team experience.

The prospectus also specifies several sell disciplines. The managers will sell some or all of a position when the company no longer meets the definition of cannabis company, if the security has achieved its investment expectation, if the manager’s outlook on the company’s business fundamentals or management changes, and so on.

CANIX launched in 2019, the second cannabis fund to do so after the ETFMG Alternative Harvest ETF (MJ). 

Despite strong performance — as of June 30, 2021, CANIX had returned 94.49% over a 12-month period — the fund still struggled to gain assets. As of the same time period, CANIX had only gathered $5.1 million in assets under management. 

But with the new ETF package, Bauer expects that to change. 

Rather than launch an ETF from scratch, Foothill opted for a mutual-fund-to-ETF conversion for two reasons: to capitalize on the benefits unique to the ETF structure (including accessibility, trading flexibility, lower costs, and greater tax efficiency) and to preserve its nearly three-year track record.

“We think the ETF is the best vehicle for investors,” said Bauer. “With mutual funds, if you’re not an existing large asset manager, it’s becoming more and more challenging to play in that space.”

Platform access was also a significant motivator, added Bauer.

“We’d been receiving a lot of interest in the fund, but unfortunately the [trading]  platforms are not onboarding funds like ours, so nobody could access it,” said Bauer. “This ETF wrapper will allow those investors to get access to our strategies.”

For more information on new ETFs, please visit ETF Trends.