With the exponential growth of the ETFs, “thematic investing” is rising and the “smart beta” theme is selling like hot cakes. In order to make the most of this trend, AdvisorShares plans to launch ETF on the NYSE Arca that target companies involved in the tobacco, alcoholic beverage or marijuana industries (read: Inside the Rise of Thematic ETFs).
AdvisorShares VICE ETF ACT is an actively managed fund seeking long-term capital appreciation by investing primarily in U.S. equities, including common and preferred stocks. It also invests internationally through American depositary receipts (ADRs) of companies related to alcohol, cannabis and tobacco.
The fund invests at least 80% of its net assets in securities of companies that derive at least half their net revenues from tobacco alcoholic beverages; the marijuana and hemp industries; or from legal research and development activities around cannabis-related products, as per the prospectus.
What’s Driving the Move to the Niche Space?
Alcohol and tobacco, a niche category within the consumer staples space, has a solid long-term growth potential in all types of market environments. This is especially true as tobacco products possess the highest profit margins of any consumer product despite less people smoking and heavily restricted advertising. Alcohol-related companies are also known for providing some of the largest profit margins among consumer products.
Additionally, the largest alcohol and tobacco companies are among the top dividend payers and have a history of consistent growth and dividend hikes. Some of these companies also carry a competitive advantage of operating in heavily regulated industries supported by a record of exemplary performance across multiple markets and economic environments.
Further, since demand for alcohol and tobacco isn’t affected by good or bad economic times, these companies provide some protection in down markets (see: all Consumer Staples ETFs here).
If these weren’t enough, cannabis-related companies spanning multiple industries like agriculture, biotechnology, pharmaceutical, real estate, retail, finance and other medical applications have untapped emerging growth opportunities. Continued regulatory advancements and societal acceptance of cannabis across its various formats provide tremendous upside potential that could lead to significant growth.
As a result, the ETF will provide investors an opportunity to capitalize on the profits of the industry popularly known for its consistent demand amid varying market conditions and economic cycles, thereby making it a solid pick. Below, we have highlighted some details for investors interested in this novel concept play from AdvisorShares:
The proposed fund is the only ETF that offers concentrated exposure to select leaders within the alcohol and tobacco industries, complemented by the emerging upside of cannabis-related companies. This emerging investment theme comes with intraday liquidity as well as enhanced operational and tax efficiency for its shareholders.
The product has an expense ratio of 0.75%, which is pretty steep when compared with other consumer staples funds or niche products in the space.
ETF Competition & Bottom Line
Though there aren’t any real competitors to this unique product, a couple of niche ETFs might pose a threat. The cannabis-focused Horizons Marijuana Life Sciences ETF HMMJ provides exposure to the performance of a basket of North American publicly listed life sciences companies with significant business activities in the marijuana industry. It was launched in April 4, 2017 on the Toronto Stock Exchange. Expense ratio comes in at 0.75% (read: Play the Marijuana Rush as First Marijuana-Focused ETF Launches).
Another fund Spirited Funds/ETFMG Whiskey and Spirits ETF WSKY focuses on distilleries, breweries, vintners and related luxury goods companies engaged in the alcohol business. The ETF was launched on Oct 12, 2016 and has amassed $8.1 million. It charges 60 bps in annual fees.
Apart from these, there are several consumer staples ETFs that offer minimal exposure to the tobacco and alcohol industries.
The proposed fund, if approved, could give investors a pure play on the alcohol, cannabis and tobacco industries. The ETF will no doubt get a first-mover advantage that could help in garnering immense investor interest. Further, it will be prudent to focus on this industry which enjoys steady demand even in times of economic and political uncertainty.