Cinthia Murphy, Managing Editor, ETF.com
The ETF market may soon welcome its second marijuana ETF, this one coming from Innovation Shares. The planned ETF currently in registration tackles the issue of custodial risk head-on by proposing to use a broker-dealer instead of a bank to custody cannabis stocks.
As ETF.com’s Lara Crigger reported, if the approach is approved, it may potentially resolve the biggest hurdle that has prevented issuers from launching additional marijuana ETFs to compete with the ETFMG Alternative Harvest ETF (MJ). MJ is the only pot ETF on the market today—it tracks a market-cap-weighted index of global firms engaged in the legal cultivation, production, marketing or distribution of cannabis, cannabinoids or tobacco products.
Custodians are in charge of holding a fund's portfolio securities and cash, as well as making and receiving payments on behalf of the fund with respect to its securities, and custody has been a sticky point for pot ETFs.
MJ itself has had issues with custodians. Back in September, the issuer behind the ETF replaced the fund's custodian, U.S. Bank, for a new custodian, Wedbush Securities, a broker-dealer based in Los Angeles.
MJ has $640 million in total assets. It costs 0.75% in expense ratio, or $75 per $10,000 invested.
Another one-of-a-kind ETF on the market in the news this week is the ETF Industry Exposure & Financial Services ETF (TETF), which sets out to capture the entire ETF ecosystem, from issuers to liquidity providers to index providers and everyone in between.
TETF has had a challenging year, dropping 4% so far in 2018 despite the fact that the ETF market has welcomed more than 230 new ETFs this year, and seen total assets under management grow to about $3.6 trillion, with year-to-date net creations on par with previous record years.
Behind the sluggish performance is weakness among ETF sponsors, which represent about 48% of the portfolio, and collectively have faced average losses of about 20%. For example, WisdomTree Investments, the only publicly listed pure-play ETF sponsor and TETF’s top holding, is down 43% in 2018.
According to Mike Venuto, chief investment officer and co-founder of Toroso Investments, the company behind TETF’s index, TETF’s performance isn’t all that surprising. As he put it, “Given this environment, it’s not surprising that TETF’s correlation to asset growth has come off a bit.”
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