Executive Summary

Regulatory Developments

A vote to legalize recreational marijuana in New Jersey was called off after state lawmakers stated that they didn’t have enough votes to pass the new law. Nevertheless, top state politicians believe that a new vote could be scheduled before the state budget is set on June 30.

In New Mexico, Gov. Michelle Lujan Grisham signed Senate Bill 406 into law which is the first major statutorial change to the Lynn and Erin Compassionate Use Act since it was enacted in 2007. The Senate bill made broad changes to 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.

Business Developments

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.

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.

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.

Canopy 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 Canopy Growth’s entry into the U.S. as regulations surrounding the full use of hemp begin to be implemented based on the recently enacted 2018 U.S. Farm Bill.

To further develop its hemp-derived products, Martha Stewart entered a business partnership with Canopy Growth. Stewart will play an advisory role at Canopy 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.

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.

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%).
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.
The breakdown of the style factors shows the most significant positive contributions coming from Trade Activity, Growth and Earnings Variability; while the main detractors were Size and Momentum.
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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