In the world of exchange-traded funds (ETFs), first-mover advantage is significant. The SPDR S&P 500 ETF (NYSEARCA:SPY) was the first ETF to list in the U.S. and today SPY remains the world’s largest ETF.
First-mover advantage is even more important for ETFs operating in more focused, nuanced market niches. For examples, it has paid to be the first technology or healthcare sector ETF. Going even further, thematic ETFs that ultimately find success are usually among the first to occupy a particular investment niche.
The ETFMG Alternative Harvest ETF (NYSEARCA:MJ) was the first marijuana ETF to list in the U.S. and its $1.21 billion in assets under management prove it is good to be first. These days, MJ is largely known as the first marijuana available to U.S. investors and one of this year’s best-performing non-leveraged ETFs. AYear to date, MJ is up 39% despite an April decline of 5.7%.
MJ has an interesting backstory. It was not born as a marijuana ETF. The fund was originally a Latin American real estate ETF. In late December 2017, the issuer converted it to a marijuana ETF and MJ was born. That move allowed MJ to avoid some of the thorny regulatory issues associated with launching cannabis funds in the U.S. while, for some time, cornering the U.S. marijuana ETF market.
Competition Arrives for the MJ ETF
In addition to the aforementioned first-mover advantage, another hallmark of the ETF industry, like any other field, is competition. A fund that addresses even a highly focused segment (as does MJ), that proves successful (as has MJ), is likely to draw competition.
Recently, MJ got its first taste of direct competition with the debut of the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO). YOLO debuted on April 18 so as of this writing the newest U.S. marijuana ETF has been around for all of five trading days, but it is off to a decent start with just over $14.8 million in assets under management.
That does not mean MJ is ceding cash to YOLO, but the latter’s asset-gathering proficiency out of the gates does confirm the marijuana ETF market is ripe for competition. YOLO sets itself apart from the established MJ in at least two obvious ways. First, YOLO’s annual fee of 0.74%, or $74 on a $10,000 investment, is one basis point cheaper than MJ’s fee.
With MJ up significantly this year, trading out of profitable positions in that marijuana ETF to save one basis point with YOLO probably does not make sense because that one basis point in fund fee savings will be eliminated by capital gains taxes. However, investors who are new to marijuana ETFs may prefer YOLO simply because it is slightly cheaper.
Second, YOLO is an actively managed fund, meaning its managers can add or eliminated positions as they see fit. MJ is a passive, index-based marijuana ETF, meaning what investors see is what they get, at least until the fund rebalances.
The reality is MJ’s first-mover advantage in the U.S. marijuana ETF market is significant and has also created branding advantages. To some investors, MJ is the Apple or Coca-Cola of marijuana ETFs.
Importantly, the cannabis market is still in its early innings of growth. More states and countries are mulling legalization of marijuana for medicinal and recreational purposes, potentially providing MJ and other marijuana ETFs with runways for long-term growth.
As the idea of cannabis legalization gains more mainstream acceptance, investors will likely see more marijuana ETFs come to market, but even with increased competition, MJ should remain one of the dominant marijuana ETFs.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
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