Evolve buoyed by launching pot world first

Executive says beating Horizons to market is ‘gratifying’ but that the two firms represent very different approaches

Evolve buoyed by launching pot world first

It was a photo finish to match the 2004 Athens Olympics men’s 100 metre final. Where Justin Gatlin pipped Portugal’s Francis Obikwelulu by 0.01 second, so Evolve nosed out Horizons by just one day to launch the world’s first US cannabis ETF.

It was a big week for the fund providers, both of whom pride themselves on innovation. The true winner will be decided over time, of course, but there was no doubt bragging rights were up for grabs.

Both companies filed preliminary prospectuses on the same day but just two weeks and two days later, it was the actively managed Evolve US Marijuana ETF (USMJ) that claimed gold from the passive Horizons US Marijuana Index (HMUS). Both are now trading on the NEO Exchange.

Elliot Johnson, Evolve CIO and COO, told WP the competition was healthy but that last week’s result was "gratifying" and important from a brand perspective. It was exciting, he added, to be part of a team able to move that quickly.

He said: “We have built our company on being innovative. We launched the world’s first automotive innovative fund because we thought investors would need to invest in the electrification of automobiles and we launched Canada’s first cybersecurity ETF and it was the best performing ETF of 2018.

“We have a history of being first in a lot of areas. As a relatively young company, we launched our first ETFs at the end of September 2017, so we are still pretty new to the game. We think it is important that we are out there showing we can move quickly. Maybe our larger competitors can’t move that fast because maybe they have more bureaucracy and committees to go through, and maybe they just aren’t as hungry and willing.

“We got some good reaction to being first and certainly the people that are close to the business, our customers, expect that from us. It was a good week."

Johnson was keen to point out that Evolve and Horizons represent two very different sides of the same coin. Horizons produced the first marijuana ETF in the world with HMMJ and have now added HMUS to its roster, both of which are index trackers. Johnson acknowledged Horizons enjoy a higher profile than Evolve but said their respective investment philosophies significantly differ.

“We don’t think index tracking is the right way to invest in the cannabis sector. Our two products, SEED, our non-US version, and USMJ, both of those our active and the performance of SEED compared to HMMJ in the first year shows the real value active management can bring.

“We like the competition, we don’t want to just build a 'me too' product where we build an index that essentially is the same as theirs and then hope for some reason that somebody wants ours. We want to bring something different – we want to bring value add. We think that to be able to get active management in a cannabis ETF for 10 basis points less than the passive competitor is significant value for people.”

Johnson believes the active approach enables the fund to react quicker to a news-driven sector, while Evolve also employs options strategies if the team feels things have run too fast and a pullback is imminent. He backs that approach in the cannabis space and said its fund is a chance for investors to seize this “second chance” to get in on the marijuana industry.

“The US space in our opinion looks a lot like Canada did a couple of years ago,” he said. “You look at the evaluations down there and the companies that are investing in the US are much more attractively priced than Canadian ones.

“There is still some uncertainty around legislation in the US but we see a lot of catalyst for change as we see pieces of legislation making their way through congress right now.”

To date, 10 states have legalised recreational marijuana and 33 have legalised medical. Johnson highlighted the 2018 Farm Bill and the upcoming SAFE Act and STATES Act as important milestones in making the space more attractive for investors. The latter will determine that legalising cannabis at state level is the same as at Federal level, which is significant when it comes to attracting institutional investors and M&A deals.

Johnson said: “This is an opportunity in the sector that may not come up again. Once one of these things change, you would expect companies to be valued more closely to their Canadian peers.”