Executive Summary

The cannabis industry saw several notable developments during the second quarter of 2019.

In April, the House Financial Services Committee voted to advance the Secure and Fair Enforcement(“SAFE”) Banking Act. If passed, the Act would effectively allow federally regulated banks to accept revenue from businesses profiting from the sales of cannabis.

In the same month, Senator Cory Gardner and Senator Elizabeth Warren reintroduced the Strengthening the Tenth Amendment Through Entrusting States (“STATES”) Act in the Senate. At the same time, Representatives Earl Blumenauer and David Joyce reintroduced the Act in the House of Representatives. If passed, the Act would amend the Controlled Substances Act to exempt marijuana-related activities that comply with state, territory or tribal laws. The legislation would also protect banks that work with marijuana businesses.

In June, Illinois became the 11th state to legalize marijuana for recreational purposes. It is also the first state where legalization was approved by legislature. Illinois’s marijuana legalization law will allow recreational possession and sales starting on January 1, 2020, creating a new system of taxes and regulations.

In New York, although lawmakers were unable to fully legalize marijuana, they did agree to further decriminalize possession of the drug and automatically expunge many low-level marijuana convictions across the state. The bill, which would treat possession of up to two ounces of marijuana as a violation instead of a crime, is a significant step forward in a state where tens of thousands of residents have been arrested for small-scale possession.

Since legalizing marijuana in 2014, Colorado’s marijuana tax, license and fee revenue surpassed $1 billion in June. Colorado currently has 2,917 licensed marijuana businesses and 41,076 licensed individuals working in the industry that has generated over $6.5 billion of sales.

Health Canada finalized regulations for the production and sale of edible cannabis, cannabis extracts and cannabis topicals. According to a recent report from Deloitte, the Canadian market for such “next-generation” cannabis products is estimated to be worth C$2.7 billion annually, with edibles contributing more than half of expected sales.

Shareholders at both Canopy Growth (NYSE: CGC) and Acreage Holdings (CSE: ACRG) voted in favor of the planned $3.4 billion merger between two of the largest cannabis companies. The merger is conditional on federal legalization of marijuana in the United States.

Fund Performance

MJ’s Q2 2019 return of -12.21% was a bit of a correction from Q1’s 45% performance and a reminder to investors of the potential for volatility in the cannabis space.

Looking at sector performance, Real Estate (specifically Innovative Industrial Properties) was the most significant positive contributor, with a 55.2% return for Q2, followed by Industrials (+22%). Health Care (-16%) and Consumer Staples (-7%) were the largest negative contributors at the sector level.

At the security level, leasing company and recent addition to MJ, Innovative Industrial Properties (IIPR, +55.2%), was the largest positive contributor to performance. Secondary beneficiaries Arena Pharmaceuticals (ARNA, +30.8%) and Scott’s Miracle-Gro (SMG, +26.1%) helped MJ’s performance as well. Detractors from MJ’s performance included Insys Therapeutics, which filed for bankruptcy during Q2 (INSY, -92.6%), Tilray (TLRY, -28.9%), and The Green Organic Dutchman (TGOD, -31.4%).

In terms of fundamental factor performance, factors contributing positively were the portfolio’s exposures to the style factor Momentum as well as Global Markets and the Canadian Dollar. On the negative side, Pharmaceuticals, Trade Activity, and Earnings Variability were the largest detractors.

The breakdown of the style factors shows the most significant positive contributions coming fromProfitability, Growth, and Momentum; while the main detractors were, as seen above Trade Activity and Earnings Variability.

Fund Performance (as of 6/30/19)

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.

 

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.

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