ETF Expert Corner

AdvisorShares’ Dan Ahrens Spotlights New Vice ETF (ACT)

December 19th, 2017 by ETF Store Staff

Dan Ahrens, Managing Director and Chief Operating Officer at AdvisorShares, spotlights the recently launched AdvisorShares Vice ETF (ACT) and discusses the burgeoning marijuana industry.



Transcript

You can listen to our interview with Dan Ahrens by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the AdvisorShares Vice ETF, ticker symbol ACT, which by the way, stands for alcohol, cannabis, and tobacco. This ETF just launched last Wednesday. Joining us via phone from New York to discuss this ETF is Dan Ahrens, Managing Director and Chief Operating Officer at AdvisorShares. He's also the portfolio manager for this ETF. Dan, welcome to the ETF Store Show.

Dan Ahrens: Hey. Thanks having me on.

Nate Geraci: Dan, this is the first ETF providing concentrated exposure to companies associated with alcohol, cannabis, and tobacco - so-called “sin” stocks. Take us from there. How many holdings are in this ETF, how are they selected, and what's the overall investment approach here?

Dan Ahrens: Sure. Now, it's a fairly concentrated portfolio purposely, because we have a fairly limited universe of stocks to look at. I will say that we are big believers in long-term alcohol and tobacco holdings. We think they perform well, through good markets, bad markets, good economies, bad economies, somewhat recession resistant. People are going to drink and smoke no matter what's going on. They're very high profit margins companies.

Now, we are the first fund that's also going to have cannabis, marijuana exposure. Was not easy to do. Had a great deal of conversation with the exchanges, with custodian banks, a lot of comments back and forth with the SEC to get this thing launched. I really want to stress that we're only investing in what's legal at a federal level. That's mainly biotech, pharmaceutical type companies, but we think our investible universe is going to grow in the future.

Nate Geraci: Dan, can you give us an idea on some of the specific cannabis-related stocks. Who are some of the companies here and what exactly do they do?

Dan Ahrens: Well, one that always seems to amuse people, but we think is an excellent stock, is Scotts Miracle-Gro. Now, are they a marijuana or cannabis company? No. Everybody that has some type of marijuana company list, or index, seems to include Scotts Miracle-Gro. But other companies that are more fitting ... There's some very good pharmaceutical companies. AbbVie and Catalyst.

Now, I can't say it's their main business, but they are registered with the DEA to handle cannabis and what's called cannabinoids. They're working on drugs, medications to get FDA approved using cannabis. There's yet some other companies, like Insys. We have a handful right now, but I'm really looking to add a number of other companies in the coming weeks, looking for good entry points. Can’t really say what those are at this point, but it can be natural cannabis, it can be synthetic cannabinoids. Companies that are looking to get FDA approvals for drugs.

Nate Geraci: Dan, I'm sure we could spend, geez, an entire show talking about this but, very high level, what does the current regulatory landscape look like surrounding cannabis? I know it's very state specific. There are a lot of nuances here. Where are we in terms of moving towards broader legalization?

Dan Ahrens: Well, we think it's going to come at some point. Now, the current government is negative on cannabis approval. As you said, there are a number of states that have approved it in some form or fashion. They vary. The kicker is, I don't really care about those. It doesn't make any difference to me, because I could really only invest in what's legal at a federal level. That's a big kicker.

You're not going to find custodian banks and lots of other vendors that want to work with something that's legal in a state, or even legal in Canada, that's not legal on a federal level in the US. That's limiting, but at the same time, I'm investing in some great, in my opinion, pharmaceutical, biotech companies. There's not any crazy OTC and pink sheet cannabis stocks in here, none of that. We're looking at large companies, but we still think there's tremendous upside by investing there.

Nate Geraci: Our guest is Dan Ahrens, Managing Director and Chief Operating Officer at AdvisorShares. We're spotlighting the AdvisorShares Vice ETF, ticker symbol ACT. Dan, from an investment thesis standpoint, as you mentioned earlier, one of the things about vice stocks is that people smoke and drink no matter what is going on in the economy. These stocks are viewed as being rather recession resistant. Can you expand on that a bit? What does the data actually look like here?

Dan Ahrens: Well, first of all, cannabis ... Excuse me, tobacco is by far the biggest profit margin consumer product. The profit margins built into tobacco and all tobacco products far exceed any other consumer product. That's how those tobacco companies stay profitable. People look at smoking bans, and all of the information that's out there about smoking that's bad for you, but these companies have huge profit margins, they're also good innovators. There's an awful lot happening with smokeless and vapes and smoking secession technologies. That's how those tobacco companies are staying relevant. The don't have much competition. There's no advertising, with huge barriers to entry.

If you simply look at a chart. Pick a major tobacco company, or pick the sector overall. Look at the last 10 years, 20 years, 30 years, 50 years. Tobacco is an outperformer, through good and bad markets, pretty much the same. Something else we've seen although, is it's cyclical. Sometimes high end wine, high liquors are outperforming beer. Also, in beer, you see a big movement towards craft beers. Now we have a lot of craft liquors. We also see the big companies acquiring the small, local craft distillers, and craft brewers. Again, pick a company, Diageo, Constellation brands. Just look at these companies for the last 20 years. You're going to be impressed. We don't think there's any good reason that's going to stop.

Now, one last piece about these. We think there's going to be a great deal of overlap between cannabis and alcohol and tobacco. If it is ever legalized at a federal level, who do you think is going to dominate that industry? The tobacco companies. They have patents. They have trademarks already for if and when federal legalization comes. We've also seen some alcohol companies already making investments in cannabis. It's not legal in the US, but they might make cannabis or marijuana beer for other parts of the world. These are also companies that have done a great job of navigating heavily regulated industries for decades. We think that dovetails nicely into expansion that we think is coming in the future of cannabis.

Nate Geraci: Again, we're spotlighting the AdvisorShares Vice ETF, ticker symbol ACT. Dan, where does this ETF fit in an investment portfolio?

Dan Ahrens: Well, it's very simply an all equity fund. It depends on the individual and the advisor, but I think it’d be part of a core. Depending on how people set up the vast allocations, it could be a satellite type of holding for their core equity. I had a good call last week with a big advisor. He said he's hearing more and more from his clients recently.

The same fears that come up every couple years about, is the market getting frothy? Is it getting high? Do I need more downside protection? He was agreeing with our thought that these alcohol, tobacco companies can be rather recession resistant. But we think the cannabis exposure, the biotech, and the pharmaceutical works really well with that, and provides some aggressive growth in the same fund. We think those really work well together.

Nate Geraci: Dan, interestingly, you previously managed a mutual fund with a somewhat similar approach. You actually founded that fund. I'm curious, what made you decide to head down the ETF route?

Dan Ahrens: Well, I'm at AdvisorShares and have been here a number of years. We're in the business very simply of launching actively managed ETFs. Most of our funds are sub-advised. We have some very good sub-advisors. Dorsey Wright, Wilshire, Newfleet, Pacific Asset. But we always thought in the back of our minds, we wanted to do a vice ETF at some point when the time is right.

We also have a lot of people contacting us wanting to do a marijuana or cannabis fund. We tell them, we don't think that'll work. We don't think there's enough to invest in, that's federally legal, listed, large, liquid. And then we got the idea of putting these things together. I was in the mutual fund business prior.

An awful lot of people in the ETF space came from the mutual fund world. There's a great deal of similarities. We're all 1940 Act Investment Companies. I think the ETF is a better mouse trap, more tax efficient, can often have lower fees. You can use limit orders. There's a lot of reasons to be in the ETF chassis if you will, as compared to the mutual fund chassis.

Nate Geraci: Given that ETFs do require daily transparency, are you concerned at all with being front run? I know some other fund companies have voiced concerns and they've been hesitant to offer active strategies in ETFs because of these concerns. What's your take on front running?

Dan Ahrens: I think it's silly. I don't think there's risk of front running. I think these companies might want to keep their daily fund transparency to themselves for other reasons. A lot of people don't understand ... If I'm doing trades in my portfolio today, that's not public information until after the market closes. Our website updates overnight. You can see the daily transparency holdings on our website tomorrow. That really doesn't make front running possible. We are big believers in that transparency. I think investors should be able to see what's under the hood of the fund. We don't have anything to hide. We're proud of our holdings.

Nate Geraci: Dan, we have about two minutes left here. What about just the case for active management? I'm sure you've seen all the data showing that active managers typically underperform their benchmarks after fees. What's the case for active management in this particular area of the market?

Dan Ahrens: Well, in this particular fund, I think it is extremely important. You know, we're going to be in the big tobacco companies. We're going to be in the big alcohol companies. But I wouldn't want to be market cap weighted. We want to be able to pick and choose what we want to underweight and overweight. When you look at cannabis, this is really just in its infancy, starting to get off the ground. I think there's going to be, let's call them land mines - investors out there, that they're trying to invest in penny stocks OTC. There's going be a lot of hits and misses in marijuana and cannabis. I think active management, where we get to really know these companies well, and pick and choose, is extremely important here.

Nate Geraci: I'm sure, as you are aware, there are a handful of filings with the SEC for marijuana focused ETFs. There already exist a standalone alcohol focused ETF. About 60 seconds left here - how do you see this area evolving, moving forward? I guess particularly on the marijuana ETF side

Dan Ahrens: Well, there's going be funds come out in the future, if and when there's federal approval at any point. Right now, I don't know if any of those funds are actually going to get launched and off the ground. I think there's a lot of headwinds. I don't think there's enough large listed liquid companies to invest in. It's very easy to do a filing, initial filing for a fund. Let's wait and see when and if these funds get off the ground. Coming at some point. I don't think it's coming any time soon.

Nate Geraci: Well, Dan, with that, we'll have to leave it there. Excellent ETF spotlight today. Congratulations on the launch of ACT. I hope you and your family enjoy just a wonderful holiday season. Thank you.

Dan Ahrens: Thanks. You too.

Nate Geraci: That was Dan Ahrens, Managing Director and Chief Operating Officer at AdvisorShares. Again, the ETF is the AdvisorShares Vice ETF, ticker symbol ACT, and you can learn more about this ETF by visiting advisorshares.com.