On July 9th, 2019, Innovation Shares launched The Cannabis ETF (NYSE:THCX), offering investors access to “the first passively managed pure-play ETF solution for investing in cannabis,” marking the third marijuana-focused exchange-traded fund to launch on the NYSE.
In addition to offering investors a one-of-its-kind play on the booming pot industry, Innovation Shares also boasts that THCX’s 70 basis point management fee “makes it the lowest cost US-listed cannabis ETF”, when compared to the ETFMG Alternative Harvest ETF (NYSE:MJ), which has a 0.75% management fee, and the AdvisorShares Pure Cannabis ETF (NYSE:YOLO), which has a net expense ratio of 0.74%.
ETF Management Fees 101
In addition to the standard costs and brokerage commissions charged by your broker, exchange-traded funds, a.k.a. ETFs, also charge management fees to the fund as a percentage of assets under management.
According to the Wall Street Journal, the average ETF charges an expense ratio equal to roughly 0.44% of AUM. That means that for every $10,000 invested in the ETF, $44.00 per year will go to annual fees that cover the fund sponsor and asset manager’s costs of doing business. Compared to traditional mutual funds of yesteryear, ETFs charge substantially lower fees.
That being said, it is important to understand the complexities of each and every fund and how that corresponds to costs and fees. For Innovation Shares’ Cannabis ETF, there is more to the 0.70% management fee than meets the eye.
How are the THCX Fees So Low?
While on the surface, yes, THCX carries a management fee of 0.70%, a deeper dive into The Cannabis ETF’s prospectus shows that 70 basis points is actually the net annual fund operating expenses.
The fund actually charges 0.95% in management fees, but thanks to a “Fee Waiver and/or Expense Limitation” agreed to by The Cannabis ETF’s advisor, OBP Capital, the fees have been temporarily reduced by 25 basis points.
Lasting less than a year from the fund’s first day of trading, the fee reduction only goes through June 30th, 2020, and may be terminated by the fund’s Board of Trustees at and time.
For the cannabis investors that bought shares of THCX for a short-term way to play the weed markets, the impending fee increase probably won’t impact you as much. That being said, all investors should be sure to take a deep dive into the prospectus and consult their financial professional before making an investment decision.
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