Episode Details

 

Why MSOS Doesn't Own Cannabis Stocks

Brief Description

MSOS looks like a cannabis-stock ETF on the outside, but underneath the hood it is built very differently from a traditional ETF.

This Notebook explores the legal and financial plumbing that led MSOS to use total return swaps to obtain economic exposure to U.S. cannabis operators rather than simply holding many of their shares directly.

The research follows the trail from federal cannabis restrictions and custodial limitations to swap counterparties, collateral, financing costs, valuation, liquidity, and tracking error.

The big lesson is simple:

When you buy an ETF, don't just ask what it owns. Ask how it gets its exposure.

MSOS gives us a real-world classroom for understanding that difference.

Why MSOS Doesn't Own Cannabis Stocks

Here's a question that sounds simple:

If MSOS is designed to give investors exposure to U.S. cannabis companies, why doesn't it just own the cannabis stocks?

That's where things get interesting.

In this episode of Trail Boss Radio, we're going underneath the hood of the AdvisorShares Pure US Cannabis ETF (MSOS) to examine the financial plumbing that makes this ETF different from the traditional ETFs most investors are familiar with.

On the surface, you see an ETF.

Underneath, you find total return swaps, counterparties, collateral, financing costs, OTC securities, valuation issues, and regulatory constraints.

And that changes the way we should think about the fund.

🚂 Start With the Federal Constraint

The first stop on the trail is federal cannabis law.

Because many U.S. cannabis operators are still caught between state legalization and federal restrictions, traditional financial institutions face limitations when dealing directly with plant-touching cannabis businesses.

That creates a problem for an ETF trying to provide investors with exposure to those companies.

So MSOS uses another route.

The total return swap.

🔧 What Is a Total Return Swap?

Think of it as a financial agreement between MSOS and another financial institution.

Instead of MSOS simply taking direct ownership of certain cannabis stocks, the swap can give the fund the economic performance of those stocks.

In other words:

MSOS doesn't necessarily need to own the stock to participate in its financial performance.

That's the key idea.

And once you understand that, you begin to see why MSOS is such an interesting classroom for learning about ETF mechanics.

💰 Follow the Collateral

But swaps aren't magic.

They require collateral.

The fund and its counterparties have financial obligations to each other, and that means cash management becomes an important part of the story.

This is one reason looking at an ETF's cash balance by itself can be misleading.

A dollar sitting inside the fund isn't necessarily a dollar sitting there waiting to buy another stock.

Some of that cash may be connected to the fund's derivative and collateral arrangements.

That's what we mean by financial plumbing.

📊 Then Comes Tracking Error

Here's another important lesson.

If MSOS were simply a basket of stocks sitting in a brokerage account, we might expect its performance to closely follow that basket, minus normal fund expenses.

But swaps introduce additional moving parts.

Financing costs can create a drag.

Collateral can earn interest.

Counterparty pricing can matter.

OTC liquidity can affect valuations.

Margin requirements can change the economics.

And during periods of extreme volatility, the difference between the ETF and a hypothetical basket of underlying securities can become an important thing to understand.

So the question isn't simply:

“Did the cannabis stocks go up?”

The better question is: