Why MSOS ETF Investors Face a Dangerous Gamble

The AdvisorShares Pure US Cannabis ETF (MSOS) has long been a proxy for betting on the U.S. cannabis industry's growth. But with its portfolio concentrated in debt-laden multi-state operators (MSOs), regulatory headwinds, and a sector in free fall, investors are now staring at the risk of all-time lows. Here's why MSOS is a risky gamble—and what to do instead.

The Concentration Problem: 80% of the ETF's Fate Rests on Five Companies

MSOS's top five holdings—Green Thumb Industries (GTBIF), Trulieve (TCNNF), Curaleaf (CURLF), Verano (VRNOF), and Cresco Labs (CRLBF)—account for 81% of its portfolio, with the top three alone making up 64%. This extreme concentration leaves investors wholly dependent on the success of a handful of MSOs, many of which are drowning in debt.

Take Curaleaf, which carries negative tangible book value and massive net debt, yet still represents 14% of MSOS's holdings. Its stock has plummeted 71% since November 2024 as liquidity tightens and competition intensifies in key markets like Florida. Meanwhile, Green Thumb Industries, despite lower debt, trades at a 3.9X EV/EBITDA multiple—a premium that assumes flawless execution in states where growth is already stagnant.

Regulatory Headwinds: 280E Taxation and Federal Delays

The cannabis sector's Achilles' heel is Section 280E, which bars companies from deducting ordinary business expenses. For MSOs with razor-thin margins, this is a death sentence. Even “successful” operators like Trulieve—which trades at a 2.3X EV/EBITDA multiple—are burdened by tax liabilities that make their valuations misleadingly cheap.

Federal delays have only worsened the pain. The DEA's postponed rescheduling of cannabis and ongoing collusion allegations have eroded investor confidence. Without federal relief, MSOs face rising capital costs, banking hurdles, and state-level regulatory chaos.

The Underperformance Is Unavoidable

MSOS's NAV has already fallen 31% year-to-date in 2025, and its top holdings are collapsing:
- GTBIF: Down 34% since January.
- Trulieve: Down 26%, despite Florida's dominance.
- Curaleaf: Down 45%, with its stock near $0.80—barely above penny-stock status.

The ETF's cash drag (77% of holdings in swaps/collateral) adds insult to injury, limiting upside when markets rebound.

Strategic Alternatives: Diversify or Exit?

1. Shift to Ancillary Stocks

Instead of betting on MSOs, consider companies in cannabis ancillary services—testing labs, packaging, or technology. These businesses face fewer regulatory hurdles and often have clean balance sheets. For example:
- GrowGeneration (GRWG): A hydroponics retailer with no direct cannabis exposure.
- BDS Analytics (BDSX): A data and software provider to the industry.

2. The CNBS ETF: A Safer Play

The Cannabis ETF (CNBS) holds a more diversified portfolio, including international exposure and ancillary plays. Its top holdings (e.g., Canopy Growth, Tilray, and Aurora Cannabis) are less concentrated than MSOS's, with no single position exceeding 10% of the fund. While CNBS also faces risks, its lower concentration and exposure to global markets reduce reliance on U.S. MSOs' debt-laden struggles.

Action Items for Investors

1. Sell MSOS: With its top holdings near support levels and no catalysts for relief, further declines are likely.
2. Reallocate to CNBS: A 50% position in CNBS offers diversification without abandoning the sector entirely.
3. Dip into Ancillaries: Allocate 20–30% to ancillary stocks with strong balance sheets, such as Scotts Miracle-Gro (SMG) (indoor gardening tools) or Ball Corporation ( BLL ) (cannabis packaging).

Conclusion: The Writing Is on the Wall

MSOS's concentration in debt-heavy MSOs, coupled with regulatory stagnation and poor execution by its core holdings, makes it a high-risk bet. Investors who cling to it risk losing far more than they gain. Diversification—or a full exit—is critical to avoid joining the ETF's relentless march toward new lows.

The cannabis sector's future isn't dead, but MSOS is increasingly a relic of its past. Move quickly, or pay dearly.

Disclaimer: This analysis is for informational purposes only. Consult a financial advisor before making investment decisions.