Inside the World’s Largest Cannabis ETF: How Dan Ahrens Picks Stocks

Dan Ahrens, Managing Director and Chief Investment Officer at AdvisorShares, joins Higher Exchanges for a look inside the world’s largest cannabis ETF.

Dan explains how he evaluates cannabis companies, builds positions across the MSOS and YOLO ETFs, and decides when a declining stock represents opportunity versus a broken investment thesis.

The conversation also covers the financial metrics that matter most, how management quality and capital allocation influence stock selection, why major holdings carry different portfolio weights, and how Dan manages concentration and downside risk.

We also get into swaps, custody, counterparty risk, liquidity, and how uplisting could change the investable universe.

Higher Exchanges is hosted by Jesse Redmond and Morgan Paxhia.

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Transcript

SPEAKER_00 0:00

Welcome back to higher expands. Number one independent cannabis investment. We break down complex cannabis markets. Career hosts. Just redmond. Work them back.

SPEAKER_02 0:27

Welcome back indeed. I am Jesse Redman, Chief Strategy and Investor Relations Officer at Leaf Brands, and I'm back with the very tan, the very grizzled veteran. His name is Morgan Paxia. Morgan, how are you, man?

SPEAKER_03 0:43

Morgan, can you hear me? I'm doing great. It's a hot, steamy summer in America right now, but we're doing great.

unknown 0:52

Yeah.

SPEAKER_03 0:52

And I'm really excited to hear you have can you hear me?

SPEAKER_02 0:55

I can hear you, Morgan. I wanted to throw it over to our guest. We're really happy to have Dan Ahrens, manager director and chief investment officer at Advisor Shares. Dan, I appreciate you taking the time.

SPEAKER_01 1:09

Thanks, Jesse. Happy to be here. And hello, Morgan, uh long-term friend. Um and who might want to reboot because he seems to be on a nasty uh lag behind us right now.

SPEAKER_02 1:23

Are you okay there, Morgan? Or are you uh are you lagging? I'm gonna send my buddy Morgan a text. I'm gonna send my buddy Morgan a text and uh just tell him the robots right now. Sure. Morgan, if you can hear me, why don't you uh exit and come back in or do something? Because it seems like you're on a pretty good lag there. Sorry, guys, just texting Morgan to exit and come back. But we do that, Dan. Let's let Morgan work out the kinks, as we say, in the industry. You are a fascinating guy, Dan. You have a lot of stuff going on over at VisorShares, and you have an interesting background as well. So why don't you tell us a bit about who you are and uh what you're up to over there at the Advisor Shares complex?

SPEAKER_01 2:07

Sure. Well, I think a lot of people that follow cannabis closely, at least, might uh know. But um, you know, I've been managing ETFs for 15 something years, and I managed mutual funds before that. And um, you know, back when we first founded Advisor Shares uh along with Noah Hammond, uh who's his baby, um, he hired me and thought at some point, you know, we might need to do a Vice-themed ETF because I had founded this thing a long time ago called the Vice Fund, Mutual Fund that had a alcohol and tobacco and gambling and all that good stuff back before anybody ever imagined investing in in cannabis. And um, you know, you move forward a number of years. We had a uh a number of other uh active ETFs going. We had we're the we have the uh one of the very first active managed exemptive reliefs for ETFs. So we're kind of the longest tenured active ETF uh shop. And active doesn't mean overly active, it doesn't mean tactical. A lot of people need to understand this. It simply means it's not an index. And um, I'll skip ahead to cannabis investing. You don't want an index that forces rebalances every month or every quarter. You want an actively managed cannabis ETF, even if active means you're being inactive, you're not forcing rebalances. Active means uh you're simply not following an index, and you probably don't want to upset the Apple cart. But I digress. Uh, Advisor Shares has 17 funds. We have a number of different portfolio managers and some subadvisors of some of those funds. And a number of years ago, um, people started looking at cannabis investing. I said, no, that's probably not gonna work. There's not enough to invest in, it's not liquid enough. It progressed though, it progressed a little bit. So we were one of the very first applicants to the SEC for um a cannabis ETF. They asked us to get legal opinions. Um, we went to a third-party legal firm, it's not our regular council. We went to people that had specialties in investment companies and cannabis and got legal opinions. And um, then we got another legal opinion that invests about investing in cannabis and investing with total return swaps. We were the first company to do that in the cannabis space because that's the only darn way that you could invest in US plant-touching cannabis companies. So we invented that. Uh, now there's billions and billions, if not trillions, of dollars in in uh mutual funds and ETFs using uh total return swaps for other purposes. We only invented the part of using it as a substitute for investing directly in cannabis stocks. Um a lot of other cannabis funds have come and gone in that time. And we started off with our fund YOLO, which is now a global strategy, and then we uh about a year later invented uh MSOS as a US only strategy, and it happens to be by far, by far, the largest and most liquid uh cannabis ETF in uh in existence, floating somewhere around a billion dollars. And how big how big is YOLO, Dan? YOLO's uh under $50 million. It's it's a I don't know, $35, $40 million in assets, which is sizable for a cannabis ETF, but uh much, much smaller than um MSOS or MSOs, if you want to call it that. Uh because I think it just shows how many investors, how many people think that the opportunity, the opportunity that we're still, still waiting for is on the US side of the border rather than the more the global global reach strategy.

SPEAKER_02 6:12

Yeah, that's interesting. MSO or YOLO was first in a broader strategy with more diversification, which typically would you think earlier launch, broader mandate, typically more AUM. But in this case, people have honed in on that MSO opportunity as the one they want to target.

SPEAKER_01 6:27

Usually, and also uh performance. Um, you know, there's a lot of different time frames that anybody can look at, but for a large part of it is its existence, the Fun Yolo was the top performing cannabis ETF in existence. Again, various time frames. And um, that's really flipped in the past year once uh we got the executive order from Trump. Um, cannabis stocks US side really took a big pop uh in the fall with a great deal of volatility. Don't want to forget that. Um, but uh it's certainly cooled off and got stagnant in this calendar year. But uh MSO's has outperformed its sister fund, if you want to call it that, YOLO, um, more recently.

unknown 7:14

Yeah.

SPEAKER_02 7:15

Well, Morgan continues working at the Kinks. Why don't I jump in and tell you about a little bit about one of about our great partner at FlowHub and thank them for the continued support of higher exchanges? They recently launched their 2020-2026 state of AI and cannabis retail report. And one statistic really jumped out to us. Nearly 50% of cannabis retailers are already using AI in some part of their business. Think about that for a second. Two dispensaries on the same street, same product, same taxes. One is leveraging AI to streamline streamline operations, with the other is relying on late nights and manual processes. Over time, that's a competitive advantage that's only going to widen. That's just one of the insights of the report. Head over to FlowHub.com, check out the state of AI and cannabis retail 2026, full of interesting data. I loved it, tons of practical insights. Check it out, Flowhub.com. Thank you for your support. So, Dan, let's talk a little bit more about the specifics of the funds. Um, you know, I'm I always start out saying, like, what's the opportunity set right here? Like, what can we do? What's the investable universe? To me, that's the first question in due diligence is where are you guys fishing? What pond are you in? So, Dan, help me understand what qualifies a company for MSOS and YOLO. Are there any hard criteria their investors should know?

SPEAKER_01 8:29

Well, uh again, YOLO was the first uh fund in existence be well before MSOs. And um it's interesting when we first filed a prospectus um with the SEC and we're speaking to the New York Stock Exchange, which is our listing venue for this fund, and talking to BNY, formerly known as BNY Mellon, uh, about custody and settling trades and so on. It set off a lot of bells. People had big concerns. How the heck can you invest in cannabis? And um that's even after Canada, or around the same time they legalized and these Canadian companies were able to listen to some of the exchanges, but it still set off all kinds of bells. So, for your criteria, we're not talking about a typical fund where our criteria is market cap, liquidity, size, cash flows, uh, you know, all this fundamental analysis you can do on a stock and writing a prospectus about what are the principal investment strategies, what are the constraints. No, the exchange, the New York Stock Exchange, and the bank were only concerned with what is legal and what they can custody. And we had to do a lot of negotiation with them. And as I said, we uh had to the SEC says, nope, you need to get a third-party legal opinion on this thing and supply it to us. And everybody came down to the same criteria. The stock better be listed on NICE or listed on Nasdaq or listed on the Toronto or even the Toronto venture. Later they expanded that to Australia for the small handful of stocks that that makes a difference for. Very small group. And it's interesting, Jesse, that in the years that followed, virtually all of the big wirehouses and banks and brokerages came out with formal cannabis policies that very much mirrored that same set of policy constraints. Um, if you aren't listed on Nasdaq, NYSE, NYC, or you know, the Toronto, you are blocked throughout BNY Mellon. Um same thing happened to Cowan, who used to be very big in the cannabis space and got acquired by TD Bank. And again, whether the constraints are behind the scenes or in front of the scenes, the the same thing goes for all the big bank wirehouses like B of A Merrill and Morgan Stanley Chase and JP Morgan and everybody else. So um the criteria you got to be listed on those exchanges. Then it's a pretty darn small universe of stocks that are listed on those exchanges and have even workable price, liquidity, trading volume. Um, and that's a small universe of stocks. Then we don't want the fund to be a market cap weighted index, and uh we're actively managed, even though we're not very actively managed. Um as a portfolio manager, we use a lot of outside information and get decide what we want to invest in. Simple as that. But it's really evolved over the last five years, as you guys can imagine.

SPEAKER_02 12:06

And does uplisting change that investable universe, Dan?

SPEAKER_01 12:10

100%. Yes, it does. Uplisting is a beautiful thing. But you know, the the three of us guy discussed that a little bit because it is a monumental, monumental occasion when TrueLeave got listed on the New York Stock Exchange. I mean, kudos to them. I mean, great job. But you guys and everybody else probably noticed they were pretty silent before that happened. There were some rumors out there, people thought there, I think that might be happening. I think there's discussions happening. But I think uh Kim Rivers and Christine and team, you know, didn't want to upset the Apple cart. They were treading very lightly, they wanted to uh see it to fruition. So what they did is they got listed on the New York Stock Exchange. Then they got in front of all the big investment firms in New York. And I I know they had the I know they've been having these meetings and uh because we talked to all those same people, but they didn't really get to go on a roadshow before the up listing. And then, hey, um, you know, Glasshouse followed just, you know, a week or two later with their listing. Uh again, a great thing. And it's frustrating as hell that the marketplace doesn't seem to really care. Yeah, I mean, we all know that it's a huge, huge occasion, but the outside market doesn't care. And we need to come back and talk about it, it goes to the state of cannabis overall. But in my fund, it is a wonderful thing, Jesse and Morgan, that I owned very large amounts of True Leave and very large amounts of Glasshouse, and I held it with four, count them four different swap counterparties. Yeah, um, registered with the SEC as security-based swap dealers and big firms, but I still had to spread out all that exposure because those firms don't want to own 10 or 15% of a company, any company. They don't want to own too much of True Leave or Glasshouse. I'm also spreading out my counterparty risk. I'm also, you know, juggling fees and capacity between all those firms, all sorts of things. So I got to take a very large amount of what I held via total return swap of True Leave and um turn it into stock. It's not much more complicated than that. I uh I sell swap, I buy stock at the same price at the same closing price. So I'm not uh upsetting the stock price. I'm not putting pressure on the bid and pressure on the ask to move tens of millions of dollars. I'm simply uh, you know, it's funny because some people say, do they really own the stock? Well, yeah, of course they own the stock. So at a swap counterparty, they own the stock to cover their backside over the swap that they're giving us. And I simply um sold the swap, bought the stock from them, had it settled to the the fund custody at BNY Mellon, and um that lowers costs, it uh improves you know ease and uh tax efficiency of the fund, all sorts of things. So uh did I did I move it all to stock? No, because the fund is so top heavy, so concentrated in its top five holdings that I own those positions directly via stock, and I still own them via total return swap. A lot of answer there for you.

SPEAKER_02 15:54

No, it's good. No, I think it's an important conversation. Welcome back, Morgan, in case you hear his voice again. Morgan, I'll keep cruising on the agenda until I get to position sizing and loop you back in. But feel free to jump in along the way. But I think we're having a valuable, nerdy conversation here, and I think that the you know, a lot of people, because we have a very nerdy audience in a good way. Um, I think a lot of folks will understand this. But just to be clear, what Dan's talking about is he wants to have a New York stock exchange listed vehicle because it attracts more investors, will have more liquidity, but he can't do that owning these cannabis names in a normal long fashion when they're on the OTC. And so what Dan is doing is he's they've done some financial engineering, which is rather clever, which is going through what they call a total return swap in order to get that exposure. So just to make sure everybody understands it, you bet you have MSOS over here, you'll have a counterparty in the middle. I'm gonna use Goldman Sachs, super blue chip, triple A rating, I think. And and then over here, you have the actual stock. So in the case of what Dan is doing, MSOS goes to Goldman Sachs. So my hypothetical example, Goldman Sachs issues a total returns drop swap in the amount of the exposure they have to the position. So let's say in this example, GTI is over here to the tune of $10 million. You don't actually own GTI in this case. Dan, correct me if I can do this wrong. You own the total return swap with Goldman Sachs. Goldman Sachs theoretically covers that position by owning the long position of the stock. They return to you the performance of GTI minus the cost of the total return swap, which we can get into later. And that's what your end return is. So it's a little bit of clever financial engineering, but it has two, in my opinion, risks or downside for all the benefits. One is that you have the cost, which we can get into later. And then number two, which I don't want to, you know, uh, you know, steal too much from the agenda, is you do have that counterparty risk, which I think is an important thing to understand. Did I get that mostly right, Dan?

SPEAKER_01 17:44

Yeah, very much right. And you know, you said we're uh, you know, being nerdy on this, but I really want people to understand what the fund does, what the fund is, how the fund works. So it's important to understand this. 100%. Um a little while ago, I just got off a uh a webinar we were doing for a group of investment advisors. And one of the questions was well, do institutions use total return swaps? Are total return swaps common? Yeah, very common. There's trillions of dollars used in total return swaps, and it's public information that you guys can look up uh who are registered security-based swap dealers. Um, that's uh SEC law that changed, or rules, excuse me, not law that changed a few years ago. And yeah, Goldman Sachs and all that every other large wirehouse and um underwriter is uh a security-based swap dealer. So um, yeah, the bottom line is when we talked to the New York Stock Exchange, when we talked to the Bank of New York Mellon, I wanted to have an investment company, ETF, same as a mutual fund. We cannot buy and settle and custody GTI stock simply because it's listed on a secondary exchange in Canada. It's only traded OTC in the US, and it is on their formal cannabis policy. That's a blocked stock. For now, I think that's all changing. We'll talk more about that in the future, but for now, GTI is um a blocked stock, it is not allowed to be custodied at Bank of New York Mellon. So we use a total return swap. And some people say, Well, how does the fund price it? Well, I'm looking at my screen right now. GTBIF is exactly $7. It's $699 bid by 700 ask. If it ends the day like that, that is how the fund prices GTI, exactly as if we owned 24 million shares and change of GTI, which the fund does. Um, the G the total return swap is exactly as we as if we own the stock. Now, there are trillions of dollars in other funds. Thousands of funds use total return swaps, or usually use them for other reasons, though. They're usually using them for leverage. Yes. Um, um, two times funds, inverse funds, all kinds of exotic things, basket swaps. We're the people that invented using those swaps exactly on a one-for-one basis, as if we owned that cannabis company directly. Nothing more, nothing fancy, not leveraged, not exotic, just a way to hold 24 million shares of GTI indirectly through those counterparties that you mentioned.

SPEAKER_02 20:46

Yeah. No, it's clever engineering. I used to hit the nail on the head there, Dan. I used to run a leveraged uh fund of hedge funds. And that's what we did. We used two to one leverage and we used a total return swap with Goldman and Credit Suisse to accomplish that. And that was back in 2005. And so it's more common. Yeah, it's kind of cool to see it 20 years later, you know, engineered in this way. But let's move ahead and talk a little bit about what I think maybe all the stuff matters, but what really matters to me is the stock selection process. Like, how do you, you know, I think people are curious, you know, how would you end up with the position positions that you do? Like, what do you look for in companies, Dan? When you're looking across, let's just take MSOS, you know, because I think that's the bulk of the bulk of the assets and makes the conversation a little bit easier. But when you're looking at that investable universe, where do you start and what are you looking for in these companies?

SPEAKER_01 21:31

Well, that investable universe is very limited. It's a limited universe of stocks. And as these funds have evolved, um, you know, the fund MSOS, Advisor Shares Pure US Cannabis ETF, has a mandate to invest primarily in US cannabis related companies. Now, at one point we we held some of the the REITs, we held some of the ancillary companies. So we had some other stuff. I really quickly learned that your average investor or advisor wanted this company, this fund, excuse me, to actually hold what its ticker implies, MSOs. So I thought, you know, if that's what people really want and are investing in this thing, that's what we should give them. So I made a portfolio manager decision. Even though we could hold ancillary companies, we could hold the REITs, I wanted this MSOs fund to be pretty pure multi-state operators. Well, now, Jesse and Morgan, you know, that's a pretty darn limited universe of not only who they are and what they are, they're publicly traded. Can I even invest in them? But which ones are large enough and liquid enough? So um there's been changes over the last couple of years, but gosh, Cure Leaf, TrueLeaf, and GTI are now pretty far and away the largest, most liquid, um, you know, most expected, if you will, which still matters, uh, tier one companies. So those are the top three holdings. But um, Glasshouse is now the number four holding. Um, and that's partially through position sizing by me and partially just by appreciation. You know, stock A goes up more than stock B. It's now a heavy more heavily weighted port uh position in the portfolio. And with this fund, I've said over and over again, we don't want to be very active. I don't think anybody really wants me pounding the heck out of the bid or the ask on any of these stocks right now, um, as we are waiting on federal reforms to hopefully make these uh volumes go up and make these things heavily traded. So if I see a stock like Glasshouse through appreciation, through stock performance turning into a heavier weighted position in my fund than Verano or Cresco Labs, I've let it ride. Does that make sense?

SPEAKER_02 24:15

It does. And so, like amongst those top few names, Dan, like how how do you arrive at curely, for example, being a bigger weighting than GTI and truly? Like, what do you like about that business that justifies the waiting?

SPEAKER_01 24:28

Yep. And that's where you again you get into what is an actively managed fund and what is an index fund, and so on, because that's a very common question, Jesse, and I appreciate it. And it's partially portfolio manager preference, and again, it's partially appreciation. So there are index funds out there, and there was an index fund in um in cannabis land that was really pissing people off a couple of years ago doing their quarterly rebalances and um really upsetting the Apple cart, uh, rebalancing pretty illiquid stocks. So that's one we don't want to do. Two, as an investor, um, everybody has a brokerage account. Pull up a darn chart. Look at Cura Leaf versus GTI over the last year, over the last year and a half. Um, one of those has greatly outperformed the other one. And um it has so again, the number one position in the fund is CuraLeaf right now. A big part of that is appreciation, it is simple stock appreciation, and I have chosen not to do a forced rebalance and trim that. I've let it ride and it's risen to the top.

SPEAKER_02 25:52

And let me pause you there.

SPEAKER_01 25:55

Oh, go ahead. Go ahead.

SPEAKER_02 25:55

I was gonna I was just gonna pause you there. Like, but there are like my old job was hedge fund due diligence and interviewing hedge fund managers, and there's some people that when will let winners ride like that, almost a momentum trade in some ways. Then there's some people that will use that as an opportunity to rebalance and say, okay, Kierleaf's ridden, but it went from one-time sales to three-time sales, making up metrics. GTI is lagging. So why don't I sell that winner and rotate into something that might be more over undervalued as opposed to keeping that momentum trade?

SPEAKER_01 26:27

That's a that's a great point. And this is where we get into cannabis investing has turned into one of the strangest investments and different things in a portfolio manager mind than I ever imagined, because you guys probably know that I also manage um AdvisorShares Psychedelics ETF um plug, ticker symbol, P S I L. Um and Jesse just uh a couple weeks ago announced Eli Lilly acquiring our largest holding a tie Beckley. And uh I sure as hell trimmed off some of that winter immediately. Um I have gotten very, very inactive in managing MSOs very purposely because um I think we're all in a waiting game right now. We are waiting on announcements of you know the the briefs that are due next month from the ALJ. Um, everybody's in a weird waiting game, and I am choosing to sit on my hands for the most part in MSO's management. I'm even more active in YOLO management. Um, I have turned more inactive, very purposely so in MSOs, because I also like the makeup of the fund right now. I am perfectly happy having CuraLeaf and a true leaf right behind it. GTI a little bit lower weighted, and I'm happy that uh Glasshouse has risen into the number four position. So I'm eyeballing these all the time. I do have the ability to make changes in these at any time. Um, you know, at some point I have to decide when I'm gonna peel off some C21 because that stock's gonna go away. But you know what? Are these stocks doing great lately? Are they doing lousy lately? Is having a um a low risk position uh in a company like C21 that's getting acquired a good thing in the portfolio right now? Yeah, it's a good thing in the portfolio. So yeah, I am um you know perfectly happy with the current makeup of the weighting of the holdings in uh MSOs right now. If I had money burning a hole in my pocket, then I might add to different stocks than adding over the portfolio overall. That's a separate question, but tactically rebalancing selling stock stock A and buying stock B, I am very purposely choosing not to do that. And I'm doing that more than I have ever done in a fund before, or I'm doing in any of our other funds that I manage right now because of this wacky world of cannabis investing we're in right now. Yeah, I feel like we're in Twilight Cup.

SPEAKER_02 29:30

Right.

SPEAKER_01 29:31

Now, um, let me go back to CuraLif. I still think CuraLeaf might have more torque than a couple of the other companies. Now, torque is a word that people um in cannabis land wanted to start using over the last six months because they thought it sounded cool. Um, but it's uh which of these companies might have more upside when things change. We're all waiting for things to change. Uh, and it might be a slower process than any of us hoped for um when those changes happen. It's still going to be a process. But this is when you get into just personal preference and my own opinions as a portfolio manager. If we have the real rescheduling that we think is all coming, if we have the ability to get uh listed on NASDAQ or the New York Stock Exchange, I happen to like Cure Leaf a great deal just for its look and feel and institutional acceptability and view from the outside world. And we're living in a world right now, guys, where we have a bunch of cannabis investors that are pretty up to speed and know cannabis investing. And then we have the rest of the population. And our cannabis world is pretty damn small and pretty damn tight. I'm talking about your neighbors, co-workers sometimes, anybody else that's outside of our um cannabis communication, they are clueless about the opportunity happening in cannabis right now. And it's not much different. And I know from experience that Kim and Christine and team have been meeting with uh major firms in New York, and they're all saying, and this sounds great, and they're sitting and waiting still. Everybody is waiting. Even the companies like uh Glasshouse and TrueLib that just got listed on the New York Stock Exchange. Um, Wall Street doesn't care, individual investors don't care, nobody cares right now. Everybody's waiting, and I'm pointing out this whole long story because when that changes, I think unfortunately, GTI has gotten off of a lot of people's radar. It was darling two or three years ago, always beat as the highest quality. Everybody still agrees they got the best balance sheet out there. But I think uh Cure Leaf is the big winner in outside people's eyes of as the biggest cannabis company. I think that gives it torque to new investment.

SPEAKER_03 32:14

What do you think? So if you guys can hear me now, sorry for the technical issues, but uh I'm back without delay. Yeah. Um so interesting point because I was gonna ask have you noticed any liquidity changes with True Leave and Glasshouse being listed? Because I've been hearing similarly, is that you know, yes, they're listed, but it hasn't really resulted in much flow activity change. But you know, has it have you experienced that as at least with like you said, I know you're you've been very inactive, and I've I've watched that jungle java does a great job keeping tabs on it and reporting. And like a year ago, you were still you know seemed like there was more work, and now you're to your point in this waiting game. But should like new capital come in? You know, have you noticed a difference with your ability to trade in those names? Like truly classes specifically being the I mean, great question.

SPEAKER_01 33:08

Great question. And um, no, for the most part, I agree. It's just frustrating as hell that the outside world doesn't seem to care that those stocks are listed on the New York Stock Exchange. Yet, are they now more tradable? Are they more liquid? Absolutely. And I'm looking at my screens right now, and um, you know, CuraLeaf, they did the reverse split, so they're eight something dollars, and True Leave was eight something dollars on their own already. True Leave has traded 800,000 shares today. That's good for TrueLeave, that's more volume than we ever used to see, or um, on an average day, regular days, than we used to see normally on True Leave. So, yeah, there's more volume trading there. Glass has traded almost 400,000 shares today. So, you know, a little bit more volume. Um, again, they are listed on the New York Stock Exchange, and now they are technically allowed to be traded and custoded at a lot more venues, like throughout BNY Mellon and Pershing, for instance. Uh, you know, they were always available at Fidelity and Schwab and a few places. But yeah, true leaving glasshouse are now available through a lot more brokerages and venues. But as you kind of alluded to, Morgan, and I said, most people don't care. There's just not that outside outside investors, it hasn't hit the mainstream news. No one's really taking notice or or making a difference, and or we're in this waiting game. So, yeah, more liquidity, more tradability, but not the real boost that everybody would hope for.

SPEAKER_03 34:53

What was the are you hearing feedback as what is the new goalpost that Wall Street's waiting on?

SPEAKER_01 35:01

The next announcements. It's really it's really the the next step of the uh of the rescheduling. And again, it technically doesn't matter to Glasshouse and True Leave, but it matters.

SPEAKER_03 35:15

Right. It's more just the continued process. Yeah, yeah, yeah.

SPEAKER_02 35:20

Yeah, I think I think it goes back to guys like this comment that I say all the time, uh, you know, say it for you, Dan, that a small cap growth manager said to me two years ago, explained everything in cannabis was an analyst. He said, Very cool story, Jesse, but how do I play the game if I don't know the rules? And that always struck me, and that's why I say it so much on the show. And I don't think it's different today, like these companies up listed, and if you're a sophisticated investor, like you still don't know how this shakes out. You don't know what the rules are. So you do one of two things. Either you make a bet in what you think the rules will be, which everyone's been burned on 97 times. So there's so people don't want to move ahead of these things, or you chill out for a while, figure out what the rules are, and say, I'll make a decision in three months. Not the biggest, not big, not a big deal to me. I'll just wait and see what happens here. And I think that's where we are. I don't think people hate those companies. I don't even think it's necessarily apathy. I think it's a calculated decision to say, tell me, wait till wait till I know the rules, and then I can decide if I want to play the game.

SPEAKER_01 36:09

Uh 100%, 100%. So people are waiting on those rules. And and part of what you just said, Jesse, was uh after they've been wrong 97 times, how many times has safe banking been floated? How much did these stocks pop when Joe Biden was running for president and said they were going to resum you know legalize? Uh, you know, how many times, to be blunt, have cannabis investors been burned? And it doesn't matter if you're Wall Street or you are an individual investor, um, they've been burned. So, yes, they're absolutely going to wait for we call it clarity. We're gonna wait for clarity. Um, and so much more is to be determined. Um, now here's another thought for you for you guys. Let's see what you think about this. Um for people that say, where's the growth? Because are these fast growth companies now or do they look great? If you're a micro cap investor or even a small cap investor, um, so people hate it if I call uh call these cannabis companies micro cap because a few of them are small caps. You expect explosive growth. You expect explosive, fantastic looking financials if you're a small capper or micro cap investor. We don't really have that among these cannabis investors, the cannabis companies, excuse me. So where's the growth come from? Well, we got to get 280e to go away. I mean, really go away. I mean, it's gone away for uh glasshouse, sort of, yeah. And it's gone away for a big part of True Leave. They had to you know separate out the uh adult east states. Um, but we need 280E to go away. That adds a lot to the to the balance sheet. You know, we can talk about uh how they're treating those tax uh provisions, but we need um all the CBD shops and the hemp business to go away. And yes, I know there's people in states that need and want products. I hope that state licensed legal dispensaries get to continue to expand in places that they don't exist yet. But yeah, it's been a really unfair playing field with the billions of dollars in sales that are going into CBD slash hemp-based products that we hope and think most of will get redirected into licensed legal, state legal dispensaries. That's really a 2027 story, probably. So um and then we got additional states coming online. So I think the actual growth numbers of the underlying companies might look a whole hell of a lot better in the future. And that's another little side story besides what you already mentioned, Jesse, of these people need clarity, they need to know the rules, they need to know how it's gonna work before they're really committed to investing.

SPEAKER_02 39:20

Do we lose Morgan again?

SPEAKER_01 39:23

Uh-oh, Morgan.

SPEAKER_02 39:25

Morgan looks discouraged. He's very discouraged.

SPEAKER_03 39:31

Um, you're good.

SPEAKER_02 39:35

Yeah, I can I I I can talk for a little bit. We've got like just five you know, five minutes or so um left here, Dan. I think you know, uh one helpful thing uh you know I'd like to get into real quick would be on the risk management side. You know, the older I get, I'm super old, guys, I'm 51. And I feel like the older you get, you realize life and investing is first and foremost a risk management game. If you can cut those losses and get some wins on the upside, things work out pretty well. But where you get really buried is that something goes down, like we've seen in you know, in cannabis, like there's been you know a 90% drawdown in uh you know, MSOS picked peaked on February 10th, 2021, I think $55 a share, Dan. And here we are now, you know, back down around four, back down around four bucks. And so that's when the sector at large. So I'm not saying, you know, I'm not assigning responsibility for you for that whole macro change, but in your portfolio, yeah, I see that. I know they're X handles. Um and so I'm curious, like in the in the portfolio, like how do you think about risk management? When kind of everything is going against you, like how do you decide when to cut an individual company or when to start trimming a name?

SPEAKER_01 40:40

Um, and again, I'll I'll go back to something I was sort of giving thoughts on earlier that managing the fund MSOS is unlike anything I've you know done in other funds. Um, you know, we have the psychedelics fund, and uh about a year and a half ago we launched uh uh HVAC, which has been a great fund, um heating, ventilation, air conditioning, and it is a picks and shovels play on AI and data centers. So we have um this industrials fund. I'm only mentioning that, besides plugging ourselves. I'm mentioning that because I can manage those funds much more tactically. I have uh you know criteria that I very much use that looks at certain analysts that have high ratings, I look at chances of earnings revisions, I look at chances of earnings beats, and we have some quantitative tools to try to use those things. And so if one of my stocks is pops up to the top of the list that I have on the watch list, and it's one of the stocks that I own, I will completely tactically sell that stock, buy a new stock, add it to the portfolio, and I can do it as an actively managed fund on any schedule. So in any given week, I am making changes tactically. Psychedelics, I have a smaller universe, so I'm rarely completely changing a position, but I'm rather constantly adding to certain positions, trimming positions in the heating in the HVAC fund. I am every week killing off some positions entirely, adding some new positions, but I also do do it carefully for tax purposes to not not uh cause taxes. Do I do any of that in MSOs? No, I really don't. I really don't uh because limited universe of stocks, I like the makeup. Um if it's in the top five holdings or so, which I'll go ahead and rattle off CuraLeaf, True Leaf, GTI, Glasshouse, Toronto, Cresco, Terrace End. If one of those stocks goes to zero, we're all fucked. Sorry for the word, but uh um does anybody in their right mind think that I can sell 24 million shares of GTI in any short period of time or want me to try? No. Now, here's another thing. This fund that owns virtually all the tradable multi-state operators in the US, it owned cannabis. Now, was everybody buying cannabis um formerly Columbia Care four and five years ago? Yeah, everybody was. It was going down, it didn't look good. Um, but I owned 20 or 30 million shares of it because this is a billion-dollar MSOs fund. Jesse, do you think I should have sold it? Yes.

SPEAKER_02 43:57

Who would have bought it? Yeah, so we You're saying, Dan, is you kind of get for lack of better terms stuck in some of these positions, your forefronts, your airs, your cannabis, your gold floors, where it's like you're not a dumb guy, like you'd like to get out of it, but getting out of it, are you saying it would just crush the name that'd be counterproductive?

SPEAKER_01 44:12

It would crush the name. Um would anybody have invested in cannabis over the last five years if we had a time machine or we knew where we'd be sitting right now. All those questions. No, of course not. Of course, it'd be nice to go back in time. Uh hindsight's 2020 very, very, very easily. But um uh to go to these questions, I'd look at my my screen right now. Here's something that's I I think it's really relative. Today, today, CureLeaf is down 5.7 million in the portfolio right now. True leave is down 4.6 million. GTI is up 2.1 million. That's nice. So when cannabis was going to zero, its entire vow entire loss for the past year was less than on one day's up or down for any of the stocks I just mentioned. I'm saying that again, it's hard to understand, like, oh, why'd you ride cannabis to zero? Because it was immaterial to the fund. Um losing two million on cannabis. Losing two million dollars on cannabis um was basically ish. It was unsellable, pretty immaterial to the fund going up and down every day. Now, if I had hindsight, I would have sold the hell out of it three years ago.

SPEAKER_03 45:55

So another way of saying it, you're just kind of like to your point, is like the top cohort is pretty well anchored and you're letting the market kind of drive it from there. So, like some of these ones that you're just you know, if they drop out, it's it's not like that bad that bad for the front and letting the winners just continue to push to the top.

SPEAKER_01 46:17

Now I'm gonna skip ahead. Uh you know, Jesse uh you know told me some questions he might want to ask me today, and he hasn't stuck to it very well at all, but now this is a great discussion. Um I'm looking at the port. I'm looking at the portfolio right now, and I only have $3.2 million worth of Vario. I would love to have more Vario at this point. Um, Vario has only traded 15,000 shares today. It's turning into a serious tier one company for its footprint and its reach and everything else. We're doing a great job, but it doesn't trade much at all. If I have money burning, if I have money in my hand, that's a stock I might add to. Um I go down the list a little bit further. I got Planet 13 in there, and I got tens of millions of shares of Planet 13. It's not really bought or sellable, so I'm glad they're merging into Vario. That's a neat thing. Um Ascend, I don't have much of that, but I possibly would add more to that. But then you go down the portfolio. Oh, Vexed is pretty solid. I have less than a million dollars worth of Vexed, it's only 18 cents a share. Pretty good company, pretty good operations. That's a stock I could possibly add more to with cash. But there's other companies in here that are in here, they're representative of the overall MSO space, but I might not want to buy them today. If somebody gave me cash and I was putting it to work, there's certain companies in this portfolio that I would add to. There's certain companies that I would not add to, and I'm not going to say who they are. Um, but I'm not really looking to try to hit the bid and sell them down tactically, if that makes sense. And again, it's very different than I would manage any of the other funds that I manage.

SPEAKER_02 48:16

Yeah, it's a different mindset with the liquidity parameters that you have to deal with, which are yeah, just way different um in terms of your ability to act actively manage some of these names. I know, Dan, uh you do run a business and you've got about 12 minutes left in the trading day. Do you need to uh jump here? No, I'm good. Why don't we finish up? Um, take just a couple of minutes, I think. Um, and Morgan, since you're back, do you want to lead this discussion? Just kind of maybe some of the more specifics about the counterparty, the counterparty risk. I think we covered it, but these are a couple of interesting elements that are important for investors. And the big one for me, um, you know, Morgan, just in terms of you know framing the discussion is understanding that counterparty risk, because when you are investing, you had this in PSDN, Morgan, and we had some candid conversations about it. You should understand the whole, you know, Scott Grossman, know what you own trademark. Um, you should, in this case, know what you own in terms of the expertise of Dan, the you know, the you know the infrastructure of advisor shares, but also in this case, I think it's unique. We do have that counterparty in there. So maybe you could flesh that out a bit, Morgan.

SPEAKER_03 49:16

Sure. Yeah, I mean, I think it's well, I mean, you talked to the we covered the why earlier. Obviously, there's the the benefit of the why. And so, you know, maybe a question for you, Dan, is because it's been a few years obviously since we've um were in the space, but how has the counterparty landscape changed? Have you seen more come in that um, you know, to your point, I think you said you have five now. Um, so you know, like is there a way you look at it from how much exposure you're putting with various groups depending on you know their balance sheets, like how how much do you have to do uh like work at this point? Um, I mean you guys are still managing it's around a billion, right? In MSOS.

SPEAKER_01 49:56

Yeah. Uh you know, it's interesting, Morgan, that the um the landscape is is constantly changing. And years ago, we used to we started with total return swaps with with Cowan. And Cowan was very deep in the cannabis space, doing lots of things. And um they were a very good partner uh underwriting total return swaps. And um, for people that don't know, um these are big Wall Street firms that have big risk departments and lawyers, and um they don't want risk, and so they own stock for all the total return swaps that they're owning. Um but then they got acquired by TD Bank and got out of the business, and we uh moved all of our total return swaps to Nomura, who gave us a very good deal. And I don't mind name-dropping them because they're in our annual report, our semi-annual reports, it's public information, and and they do filings on the stocks that they own. But um we use a word called capacity uh around total return swaps, and um Nomura doesn't want to own 10% of CuraLeaf. Well, that'd be really hard to do. Cura Leaf has a lot of outstanding shares. They don't want to own 10% of TrueLeaf, but don't want to own 10%, they don't want to own 5%. So they have limits on how much of a company, any company that they want to own. Um, they also serve other customers, other customers that don't have anything to do with cannabis, and they only might have certain amounts of balance sheet available to buy a bunch of stocks to back up all the swaps that uh they're writing for people. So we also don't want to have what you guys have both mentioned of the word counterparty risk. So um we don't want anybody to turn into Lehman Brothers uh for people that are old enough to know what that is.

SPEAKER_03 51:53

I was gonna say I don't know how much we're on it for that.

SPEAKER_02 51:55

So it feels like yesterday over here, man. Oh, yeah.

SPEAKER_01 51:59

So so um we have uh total return swaps with National Bank of Canada, we have total return swaps with Clear Street, we have uh total return swaps with Marex, we have total return swaps with Canor Fitzgerald. Um, and the amount of companies that they want are willing to own uh changes over time. Sometime their balance sheet and availability changes over time. Um, how much money they have in with other fund customers and other cannabis or non-cannabis uh products changes, and therefore the rates that we pay also are negotiable and change.

SPEAKER_03 52:40

Um just pausing there for a second. So, like obviously the chips have been just getting smoked after an epic rally. Like, do is there downstream effects when there are these other like macro movements where billions and billions of dollars are being you know either going up or down, or is that their willingness to you know their balance sheet in cannabis? And like, you know.

SPEAKER_01 53:03

Um and you know, it's not a day-to-day thing in the short-term thing. So no, I I haven't heard of any uh direct pain from uh what's happened with uh with chips and semiconductors lately. Um, but again, all all of it are are moving parts.

SPEAKER_03 53:20

And um that's yeah, I was just trying to give like some clarity to people like what what moving parts would like that you're feeling the downstream on.

SPEAKER_01 53:28

You know, it's funny. Uh um a big thing was there's a certain state in the United States that their cannabis commission wanted to view things differently than any other state did. Um, and for people that are involved in the cannabis space, yeah, yeah, that's frustrating that all the states want to manage things differently. Well, they wanted to say if any company owned five percent of a cannabis company operating in that state, they had to have a representative license with the state on the ground in that state. Um, that's a little bit you know, getting in the weeds of this thing, pun intended. But um so companies like Nomura and National Bank of Canada and Merx and Canter Fitzgerald says, Oh my god, no, there's no way we can own 5% of a cannabis company because we're not going to um fulfill that particular state's wishes. So that's why I need to print things out. Now, here's an interesting thing though. I mentioned earlier that we were able to take true leave total return swap and turn a lot of it into um stock. I didn't have to own as much swap anymore because I'm able to custody at Bank of New York Mellon, which is awesome. So, do you know which swaps I sold down and turned into stock? The most expensive ones. Because I pay a different rate at National Bank of Canada as compared to Nomura, as compared to Mereks, as compared to Canada Fitzgerald. They have different rates. I um I keep the biggest balances with the cheapest ones. And if I need to trim, I trim the most expensive ones.

SPEAKER_02 55:24

Simple as that. Do the cheapest ones of higher credit risk, though, Dan? Are those are those credit ratings similar across the board?

SPEAKER_01 55:30

I think they're very similar across the board. And um the companies I'm I'm dealing with, uh, we believe to all be uh rock solid and and safe. And um, you know, another thing is that I'm not dealing with exotic or highly leveraged swaps. Uh, we happen to know that those companies own stock for every bit of uh swap that they own, which is also why I was able to close swap on true leave and buy an equal amount of you know tens of millions of shares of stock and move it to the fund. So it's all it's always an issue. You know, what are what are the credit ratings? You know, what what is the counterparty risk there? But um the rates are not directly tied to that. It's more tied to their balance sheet availability and what they're willing to give us.

SPEAKER_03 56:21

So so it's a good point on the um, I think you're kind of mentioning this a bit with like how much they want to have exposure with the swaps, but like do you now that companies are starting to up list, like using TrueLeave or maybe Glasshouse as an example, and you're owning them directly. Does BNY or is this like a new thing you're now having to chase where they're saying we only want you like you can only own so much of this company directly, and then you'd still want to use some swaps because you don't want to go over a certain direct ownership threshold?

SPEAKER_01 56:50

Or is that and I don't know if that's too technical of a discussion right now, but I just was you know kind of curious, like what that's actually an excellent um question, Morgan, that I haven't had come up directly. And my theory is that it might be for um custody versus ownership on the balance sheet. So BNY Mellon is one of the largest custody banks in the world, they are custodying that stock for our fund. Our fund owns it and files filings that we own it, as compared to when a swap counterparty is owning the stock just on their own books to back up the risk of the total return swap. I think that might be the different animal.

SPEAKER_03 57:48

Yeah, okay. Yeah, because I was like kind of yeah, nice to Noah chimed in as well.

SPEAKER_01 57:53

But um records, yeah, yeah, yeah.

SPEAKER_04 57:59

Interesting.

SPEAKER_02 58:00

And and Dan, like when investors are looking at this in terms of the return, and just to reiterate, but not to be hopefully too basic to people, but if GTI returns 10% in a year, you own it via the total return swap. Back in my days, Dad, those are like LIBOR plus a spread. I think I was at LIBOR plus a point or point and a half back in the day. Is that still kind of how these are prices, some sort of floating interest rate plus a spread uh above that?

SPEAKER_01 58:23

100%. Yeah, it's a it's a real good point. Um, and it's it's public information, uh, if people know where to look anyway. Um LIBOR's gone away, and uh a couple of the companies call it SOFR, and some of the companies call it OBFR, which is overnight bank rate plus a spread. So it's we pay um for the cost of the swap. They're not free. We pay overnight bank rate plus a small spread. But on the other hand, this is an important thing. Um, the fund has hundreds of millions of dollars in cash earning overnight bank rates. So we're earning a ton of interest, we're also paying for the swaps. There is a spread, they're not free. Um, but uh it's not huge.

SPEAKER_02 59:13

So just to flesh this out a little bit, so far I looked is at what 3.65 right now. I don't know what Dan's rates rates are, point, point and a half. I don't know exactly what it is, but probably pushing five all in on that cost, but offset and some interest against the cash over there. So I don't know exactly where that works out, but somewhere between zero and five for sure, Dan. Does that sound like a ballpark range? Probably closer to net three or four.

SPEAKER_01 59:39

Yeah, yeah, you're in the ballpark. And again, um, you know, one counterparty charges one rate and another counterparty charges a different rate. And I try to keep uh larger balances in in the uh the lower rates. And I also want to keep all those doors open because knock on wood, I'm hoping for hundreds of millions of dollars of inflows again to this fund when uh when things change and the outside investing world takes sight of cannabis investing once again. So I'm keeping my doors open on the swap capacity, we call it. But yeah, you're in the ballpark at the cost. And again, hey, for anybody out there, mutual funds, funds inside your 401k, ETFs, all of them have fees and expense ratios. If somebody thinks they want to um, you know, just buy stocks on their own, yeah, knock yourselves out. Good luck with that. But uh the beauty of the ETF is that it is uh one fund, it's one purchase. You're you're not gonna get a capital gains distribution at the end of the year, it's tax efficient. And um, but yeah, there's fees, it's not free. Yeah, there's uh there's pros and cons there.

SPEAKER_02 1:00:58

There's a cost to the financial engineer, financial ear engineering you were doing.

SPEAKER_01 1:01:02

Yeah, and you know what? Um the thing about um if and when we hope all these U.S. cannabis companies can get up listed, I am gonna convert as much darn percentage of that as I can into non-swap, into direct stock. But I got to remind people, I'm still gonna use total return swaps. And the reason is we have this fund very purposely, super top heavy in the top holdings. And if you look at a regular mutual fund or regular ETF, it is not that top heavy. That is not allowed under the Internal Revenue Code and the 1940 Act diversification concentration rules. So that's a big part of the reason that I haven't converted all of True Leave to being holding it directly, because I fully expect to be doing the same thing with CuraLeaf. Well, I've already done a lot of it with Cura Leave because they're listed on the TSX. So I misspoke. I fully expect to be doing it the same thing with GTI and Verano and Cresco uh in the the near future because of I'm so concentrated and I gotta meet the diversification concentration rules.

SPEAKER_03 1:02:17

So is that how like the single stock ETFs they're just using a swap, right? Because they 100%. Yeah. So it's like anyone that's buying for whatever reason a single stock ETF instead of just buying the stock, they're that's that's their get-around.

SPEAKER_01 1:02:31

Yeah, back in the old days, we used to tell people because people would come to us and want to develop an ETF, and they'd say, we want to own 10 stocks. And we'd say, No, you can't do that. You have to own more stocks than that, or you're not gonna be you're not gonna fit in the 1940 Act rules. Um, now there are single stock funds and there's super concentrated funds. But yeah, they're using total return swaps. Total return swaps are very normal, very common, and there's trillions of dollars in it. It's not unique to cannabis investing. Um, people need to understand that.

unknown 1:03:04

Yeah.

SPEAKER_02 1:03:06

About at the hour here, guys. Anything else? Uh Dan, it's been a great discussion. Anything else uh you want to touch on before we let you jump?

SPEAKER_01 1:03:12

Uh, there's lots of things I want to do. No, it's been great, guys. I I hope this is good education for people, is is the main point of doing this. Um, I think you should know what you own, understand what you own. And um we all hope for better times of cannabis investing.

SPEAKER_02 1:03:33

Yeah. We're due. We're overdue, guys. Well, we'll be closing out by saying thank you to FlowHub for making today's show possible. Whether you have one dispensary or 166 like Kira Leaf, who happens to be on the TSX, having the right technology is more important than ever. That's why so many top retailers choose FlowHub. What you need to do if you have a dispensary is go to FlowHub.com, book a demo today, and see what is possible. So thank you to FlowHub for supporting today's show. Morgan, I appreciate you. I know you had some tactical struggles today. Don't beat yourself up. We all have bad days. You made it back in the end. I'm proud of your perseverance, Morgan.

SPEAKER_03 1:04:10

That's what we do in cannabis.

unknown 1:04:12

Exactly.

SPEAKER_02 1:04:13

That's kind of a cannabis experience. Yeah, you took a bit of a beating today, but you started to come back at the end. So that was nice work. Dan, really, really appreciate uh you coming on. It's uh we should have had you on sooner, and I hope uh we'll see you back again here soon. So thank you to everyone listening. Again, if you're on uh YouTube, that's been a fantastic. Hit that uh thumbs up button, like, subscribe, even hit that bell so you know when new know when the uh new shows will come out. We're gonna be off for about two weeks. I've got earnings next week and I can't deal with additional stress, and then I'm finally taking vacation the following week, but we're still good for two shows in August. We'll just cram those into the back half of the month. So look for those sometime this the third and fourth week of August. That's it, guys. I've had it. We're out of here. Uh the Views Expresses podcasts are provided for informational purposes only. Nothing we said should be considered research door recommendation. All investing involves risk. You know that you're investing in cannabis, uh, including the loss of principle.