QUARTERLY COMMENTARY 2019 Q1 - ETF Managers Group
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QUARTERLY
COMMENTARY
2019 Q1
Executive Summary
Regulatory Developments
• A vote to legalize recreational marijuana in New Jersey • In New Mexico, Gov. Michelle Lujan Grisham signed Senate
was called off after state lawmakers stated that they didn’t Bill 406 into law which is the first major statutorial change
have enough votes to pass the new law. Nevertheless, to the Lynn and Erin Compassionate Use Act since it was
top state politicians believe that a new vote could be enacted in 2007. The Senate bill made broad changes to
scheduled before the state budget is set on June 30. the program that range from allowing medical cannabis
in schools to allowing licensed manufacturers to process
home-grown medical cannabis. The Governor also signed
Senate Bill 323, which will eliminate criminal charges for
possession of small amounts of cannabis and replace them
with civil penalties, or fines.
COMMENTARY
EXECUTIVE SUMMARY (CONTINUED)
• On March 28 the House Financial Services Committee
voted to advance a revised version of the Secure and
Fair Enforcement (SAFE) Banking Act to the full House of
Representatives for a vote. The bill would offer legal safe
harbor for banks and credit unions that choose to serve
state regulated cannabis businesses if they comply with
certain reporting requirements. Currently one of the
largest obstacles facing cannabis industry growth in the
US has been its lack of access to basic financial services
since federally backed and regulated institutions have been
reluctant to take on cannabis industry clients. A version
of the bill was introduced six years ago, but this is the
first time that testimony was taken, and a committee vote
was held on the legislation. The bill had 152 co-sponsors,
including some Republicans.
Business Developments
• CVS and Walgreens both announced in March that
they would begin selling CBD products, prompting
FDA Commissioner Scott Gottlieb to express “concern”
in comments made to lawmakers during the House
appropriations committee hearing. Gottlieb recently
stepped down as FDA Commissioner in early April, but
not before stating that the agency will “be contacting
them to remind them of FDA obligations and our
commitment to protect consumers against products that
can put them at risk.” According to the FDA’s website, any
food or supplement containing CBD must be approved
by the FDA.
• Tilray (NYSE: TLRY), agreed to purchase Manitoba
Harvest for C$419 million (US$317 million) in cash
and stock to bolster its U.S. market presence for CBD
products. Upon completion of the acquisition, Tilray
expects to launch CBD-derived products in the U.S. as
early as this summer.
• Village Farms International, Inc. (NASDAQ: VFF) entered
into an agreement with Nature Crisp LLC to form a joint
venture for the outdoor cultivation of high-cannabidiol
(CBD) hemp and CBD extraction in multiple states
throughout the United States. The joint venture, Village
Fields Hemp, will be 65% owned by Village Farms and
35% owned by Nature Crisp. Nature Crisp is a private,
Georgia-based farming operation and part of the
Jennings agricultural group of companies, which grows
a diverse range of food and other crops, including hemp,
on more than 6,000 acres in the U.S. and Canada.
02
COMMENTARY
EXECUTIVE SUMMARY (CONTINUED)
• On the heels of the United Kingdom approving its new
legal framework regarding medical cannabis, Aurora
Cannabis Inc. (NYSE: ACB) completed its first commercial
export of cannabis oil to the UK, and the product has
been successfully dispensed from a pharmacy. Aurora
also appointed Nelson Peltz as a Strategic Advisor in Q1.
Mr. Peltz is expected to explore potential partnerships that
would be the optimal strategic fit for successful entry into
each of Aurora’s contemplated market segments and will
also advise on Aurora on their global expansion strategy.
• C
anopy Growth Corporation (NYSE: CGC) announced it
was granted a hemp license by the State of New York and
that it will spend as much as US$150 million to build its
first production facility in the U.S. Shortly after acquiring its
hemp license, Canopy Growth completed its acquisition of
AgriNextUSA, a hemp enterprise led by CEO Geoff Whaling,
that has been at the forefront of hemp advocacy in the
United States. The acquisition, in conjunction with Canopy
Growth’s previous acquisition of Colorado-based hemp
research company ebbu Inc., is expected to accelerate • To further develop its hemp-derived products, Martha
Canopy Growth’s entry into the U.S. as regulations Stewart entered a business partnership with Canopy
surrounding the full use of hemp begin to be implemented Growth. Stewart will play an advisory role at Canopy
based on the recently enacted 2018 U.S. Farm Bill. Growth and will assist in developing a broad new line of
animal health products. The partnership also includes
Sequential Brands Group, a consumer brands company in
the fashion, active and home categories that works with
Stewart.
• As an example of how Canadian cannabis producers
can participate in the U.S. markets prior to U.S. federal
legalization, Canopy Growth-backed Slang Worldwide
Inc. (CSE: SLNG) began trading on the Canadian Securities
Exchange. Slang does not intend to grow marijuana and
has no plans to open its own retail stores — instead, Slang
is focused on brands and distribution, particularly in the
U.S. where Slang is already in 10 states and plans to be in
10 more before the end of the year. Canopy Growth has a
warrant that allows it to acquire 32 million shares in Slang
(approximately 15 per cent of the company), exercisable if
the U.S. legalizes cannabis at the federal level.
• In Europe, Canopy Rivers Inc. (TSXV: RIV) completed an
equity investment in its portfolio company Canapar Corp.
(“Canapar Canada”), the Canadian parent corporation of
Canapar SrL (“Canapar Italy”), an Italy-based organic hemp
production and processing platform. The investment is
in alignment with Canopy River’s global-focused growth
strategy and is expected to capitalize on the rapidly
expanding European cannabidiol (CBD) market.
03
COMMENTARY
Fund Performance
MJ posted a significant return of 46.33% for Q1 2019, more than erasing effects of a significant market correction in Q4 2018.
Looking at sector performance, Health Care was the most significant positive contributor, with a 57.6% return for Q4, followed
by Consumer Staples (+17.2%) and Materials (+38.1%). MJ holds one company that is classified as an Industrial (GIMA), which
could be considered a detractor, with a return of 7% in Q1.
SECTOR CONTRIBUTORS AVG. WEIGHT (%) TOTAL RETURN (%) SECTOR CONTRIBUTION (%)
Health Care 75.40 57.60 41.95
Consumer Staples 17.35 17.21 3.32
Materials 3.97 38.05 1.54
Industrials 1.70 7.26 0.14
Financials 1.23 25.21 0.46
Other 0.15 14.59 0.15
At the security level, most MJ’s holdings were positive contributors to performance. The leaders were largely the most
recognizable players in medical cannabis: Cronos Group (CRON, +74.5%), Aurora Cannabis (ACB, +82.3%), Canopy Growth
(CGC, +61.5%) and The Green Organic Dutchman Holdings (TGOD, +101.9%). The few detractors from MJ’s performance
included 22nd Century Group (XXII, -31.3%), Tilray (TLRY, -7.1%) and Auxly Cannabis (XLY, -3.4%).
CONTRIBUTION
TOP 10 POSITIVE CONTRIBUTORS AVG. WEIGHT (%) TOTAL RETURN (%)
TO RETURN (%)
Cronos Group Inc 11.50 74.53 10.59
Aurora Cannabis Inc 7.82 82.30 5.47
Canopy Growth Corp 7.81 61.46 4.78
Green Organic Dutchman Holdings 4.41 101.91 3.73
HEXO Corp 4.07 91.66 3.26
GW Pharmaceuticals - Adr 6.13 73.09 3.18
OrganiGram Holdings Inc 3.75 90.10 3.00
CannTrust Holdings Inc 4.09 61.20 2.19
Aphria Inc 3.38 62.27 1.55
The Supreme Cannabis Co Inc 1.65 70.38 1.37
04
COMMENTARY
FUND PERFORMANCE (CONTINUED)
CONTRIBUTION
TOP 10 NEGATIVE CONTRIBUTORS AVG. WEIGHT (%) TOTAL RETURN (%)
TO RETURN (%)
22nd Century Group Inc 1.66 -31.33 -0.74
Tilray Inc - Class 2 Common 6.56 -7.12 -0.48
Auxly Cannabis Group Inc 1.55 -3.39 -0.25
INSYS Therapeutics Inc 1.69 32.00 -0.05
Cann Group Ltd 0.35 -1.35 -0.04
Huabao International Holdings Ltd 0.27 7.55 0.03
Scandinavian Tobacco Group 0.27 6.90 0.04
Japan Tobacco Inc 1.78 4.02 0.11
GIMA TT SpA 1.69 7.26 0.14
TerrAscend Corp 0.15 14.59 0.15
In terms of fundamental factor performance, factors contributing positively were the portfolio’s exposures to the global
markets as well as the style factors Trade Activity, Growth and Earnings Variability. On the negative side, style factors Size,
Momentum and Profitability were the most significant detractors from MJ’s return.
TOP 6 FACTOR AVG. TOTAL FACTOR BOTTOM 6 FACTOR AVG. TOTAL FACTOR
CONTRIBUTORS WEIGHT (%) RETURN (%) CONTRIBUTION (%) CONTRIBUTORS WEIGHT (%) RETURN (%) CONTRIBUTION (%)
Country: Style:
1.00 11.40 13.15 -2.27 0.45 -1.26
GL Market GL Size
Style: Style:
1.87 1.55 3.39 0.90 -1.17 -0.70
GL TradeAct GL Momentum
Style: Style:
1.25 1.14 1.80 -1.18 0.13 -0.30
GL Growth GL Profit
Style: Style:
1.72 0.84 1.65 -0.78 0.19 -0.22
GL EarnVariab GL DivYld
NorthAm: WestrnEurp:
0.61 1.58 1.29 0.10 -0.47 -0.10
GL Canada GL UK
Currency: Currency:
0.54 1.82 1.21 0.02 -3.78 -0.07
CAD SEK
05
COMMENTARY
FUND PERFORMANCE (CONTINUED)
STYLE RETURN CONTRIBUTION
The breakdown of the style factors shows the most significant positive
contributions coming from Trade Activity, Growth and Earnings Variability;
Earnings Variable 1.65
while the main detractors were Size and Momentum.
Momentum -0.70
Size -1.26
Leverage 0.13
Dividend Yield -0.22
Trade Activity 3.39
Profitability -0.30
Growth 1.80
Volatility 1.14
Value 0.05
TOTAL RETURN: Q1 2019
Total Return: Q1 2019
70%
60%
50%
40%
30%
20%
10%
0%
02/05/19
02/25/19
03/29/19
03/05/19
03/25/19
01/22/19
02/01/19
02/21/19
03/21/19
01/26/19
01/28/19
01/30/19
02/13/19
02/27/19
03/01/19
02/07/19
02/19/19
02/15/19
03/13/19
03/27/19
01/02/19
01/04/19
01/08/19
01/10/19
01/14/19
03/07/19
03/19/19
01/24/19
03/15/19
02/11/19
12/31/18
01/18/19
03/11/19
01/16/19
FUND HARVEST INDEX
06COMMENTARY
Performance
as of 3/31/19
On December 26, 2017, the Fund’s investment objective and principal investment strategy were substantially revised; therefore, the performance and
average annual total returns shown for periods prior to December 26, 2017 is likely to have differed had the Fund’s current investment strategy been in
effect during those periods. The Fund’s prior investment objective sought to provide investment results that corresponded to the performance of the
Solactive Latin America Real Estate Index, which tracked equities with primary listings in the Latin America region that derived most of their income from
real estate and real estate services.
CUMULATIVE ANNUALIZED
1 MONTH 3 MONTH YTD SINCE INCEP. 1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE INCEP.
MARKET PRICE -1.60% 45.98% 45.98% 74.63% 25.94% 16.68% 18.26%
NAV -1.68% 46.33% 46.33% 80.94% 25.19% 17.65% 19.53%
Fund Inception: 12/03/15 Expense Ratio: 0.75%
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value
of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current
performance of the Funds may be lower or higher than the performance quoted. All performance is historical and includes reinvestment
of dividends and capital gains. Performance data current to the most recent month end may be obtained by calling 1-844-ETF-MGRS
(1-844-383-6477). Performance is annualized for periods greater than 1 year.
Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be
found in the Fund’s statutory and summary prospectus, which may be obtained by calling 1-844-383-6477, or by visiting www.etfmj.com. Read the
prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or
premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Narrowly focused investments typically
exhibit higher volatility. The possession and use of marijuana, even for medical purposes, is illegal under federal and certain states’ laws, which may
negatively impact the value of the Fund’s investments. Use of marijuana is regulated by both the federal government and state governments, and state and
federal laws regarding marijuana often conflict. Even in those states in which the use of marijuana has been legalized, its possession and use remains a
violation of federal law. Federal law criminalizing the use of marijuana pre-empts state laws that legalizes its use for medicinal and recreational purposes.
Cannabis companies and pharmaceutical companies may never be able to legally produce and sell products in the United States or other national or local
jurisdictions.
The Fund does not invest in any U.S. or foreign company whose business activities are illegal under any applicable federal or state law.
The Fund’s investments will be concentrated in an industry or group of industries to the extent that the Index is so concentrated. In such event, the value
of the Fund’s shares may rise and fall more than the value of shares of a fund that invests in securities of companies in a broader range of industries. The
consumer staples sector may be affected by the permissibility of using various product components and production methods, marketing campaigns
and other factors affecting consumer demand. Tobacco companies, in particular, may be adversely affected by new laws, regulations and litigation.
The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by
unpredictable factors.
The Fund is distributed by ETFMG Financial LLC. ETF Managers Group LLC and ETFMG Financial LLC are wholly owned subsidiaries of Exchange Traded
Managers Group LLC (collectively, “ETFMG”). ETFMG Financial is not affiliated with Prime Indexes.
07COMMENTARY
Definitions
STYLE FACTOR DESCRIPTION DATA USED
Cumulative return over one year
Separates stocks that have outperformed over the
Momentum (averaged), skipping the most recent two
past year and those that have underperformed.
weeks
A composite metric that differentiates “rich” and Book to Price, Earnings to Price, Cash
Value “cheap” stocks. Bloomberg combines fundamental Flow to Price, Sales/EV, EBITDA/EV,
and analyst consensus data to calculate this factor. Forecast Earnings to Price,
Most recently announced net dividend
Dividend Most recently announced net dividend (annualized)
(annualized) divided by the current
Yield divided by the current market price
market price
A composite metric distinguishing between large
Size Market Capitalization, Sales, Total Assets
and small stocks.
A turnover based measure. Bloomberg focuses on
The exponential weighted average
Trading turnover which is trading volume normalized by
(EWMA) of the ratio of shares traded to
Activity shares outstanding. This indirectly controls for the
shares outstanding
Size effect.
Earnings Volatility to Total Assets, Cash
Earnings Gauges how consistent earnings, cash flows,
Flow Volatility to Total Assets, Sales
Variability and sales have been in recent years.
Volatility to Total Assets
Return on Equity, Return on Assets,
Studies firms’ profit margins to differentiate
Profitability Return on Capital Employed, EBITDA
between money makers and money losers.
Margin
Differentiates more volatile stocks and less
Rolling Volatility, Rolling CAPM Beta,
Volatility volatile ones by quantifying “volatile” from
Historical Sigma, Cumulative Range
several different angles.
Aims to capture the difference between high Total Asset Growth, Sales Growth,
Growth and low growers by using historical fundamental Earnings Growth, Forecast of Earnings
and forward-looking analyst data. Growth, Forecast of Sales Growth
A composite metric to gauge a firm’s level Book Leverage, Market Leverage, Debt to
Leverage
of leverage. Total Assets
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