Trump's Marijuana Reclassification and Its Impact on Leveraged Cannabis ETFs

The reclassification of cannabis from a Schedule I to a Schedule III controlled substance under President Donald Trump's December 2025 executive order marks a pivotal shift in U.S. drug policy. This regulatory overhaul, driven by scientific validation of cannabis's medical utility and administrative urgency, has ignited a surge in market optimism for leveraged cannabis ETFs like the AdvisorShares MSOS Daily Leveraged ETF (MSOX). However, the sector's inherent volatility, regulatory ambiguities, and the leveraged nature of MSOX demand a nuanced evaluation of its investment potential.

Regulatory Momentum and Market Reactions

The executive order, which aligns cannabis with substances like ketamine and Tylenol with codeine, signals a departure from decades of federal prohibition. This reclassification is expected to unlock access to banking services, reduce tax burdens under IRS Code §280E, and accelerate medical research. For MSOX, a 2x leveraged ETF tied to the AdvisorShares Pure US Cannabis ETF (MSOS), the implications are twofold: heightened investor confidence and amplified exposure to sector-specific risks.

Data from late December 2025 reveals a dramatic spike in MSOX's momentum score, rising from 25.11 to 80.25 within a week of the executive order's announcement. This surge mirrors broader market enthusiasm, with cannabis ETFs like CNBS surging over 54% in a single day. However, the euphoria was short-lived. Following the order's signing, cannabis stocks experienced a sharp 50.59% pullback as investors grappled with unmet expectations around banking reforms. This volatility underscores the sector's sensitivity to regulatory nuance and the challenges of timing positions in a leveraged vehicle.

Leveraged Exposure and Compounding Risks

MSOX's structure-providing 2x daily exposure to MSOS via swap agreements-amplifies both gains and losses. In Q3 2025, MSOS's net asset value (NAV) rose 102.24%, while MSOX's NAV surged 88.4% year-to-date. Yet, leveraged ETFs are inherently susceptible to compounding effects over time, particularly in volatile markets. For instance, MSOX's 50.59% post-order correction highlights the risks of overexposure during regulatory uncertainty.

Historical precedents further illustrate this dynamic. Over the past five years, the MJ ETF (Amplify Alternative Harvest) has declined 78.9%, despite short-term rebounds tied to policy optimism. This pattern suggests that while regulatory shifts can catalyze sharp gains, leveraged ETFs like MSOX require precise timing and risk management to avoid eroding returns.

Strategic Positioning and Hedging Considerations

For investors, the reclassification narrative presents a dual-edged opportunity. On one hand, the potential normalization of cannabis banking and taxation could drive long-term valuations for operators and ETFs. On the other, the absence of full federal legalization and ongoing state-level regulatory fragmentation necessitate caution.

Hedging strategies for MSOX might include:
1. Diversifying across ETFs to balance risk while maintaining sector exposure.
2. Using put options to mitigate downside risk during regulatory announcements or market corrections.
3. Timing leveraged positions post-key milestones rather than during speculative hype.

AdvisorShares itself has emphasized the importance of sustained engagement with policymakers, noting that the reclassification is a "pivotal moment" but not a panacea. This aligns with historical trends where cannabis ETFs rebounded sharply post-regulatory news but faced prolonged corrections due to unresolved legal and operational challenges.

Long-Term Outlook and Sector Dynamics

While the reclassification does not legalize cannabis federally, it sets the stage for incremental reforms. For MSOX, this could mean sustained inflows as institutional investors test the waters and state-level legalization (now in 24 states) drives demand. However, the ETF's performance will hinge on subsequent legislative actions, such as the SAFE Banking Act, which remains pending.

Analysts caution that leveraged ETFs are ill-suited for long-term holding due to compounding decay. For MSOX, this means investors must treat it as a short-term, high-conviction play rather than a core portfolio allocation.

Conclusion

President Trump's cannabis reclassification represents a watershed moment for the sector, with MSOX poised to benefit from regulatory tailwinds. However, the ETF's leveraged structure and the sector's volatility demand disciplined risk management. Investors who can navigate the regulatory landscape-timing entries around key announcements and hedging against corrections-may find MSOX a compelling vehicle for capitalizing on the cannabis industry's evolving narrative. As the sector transitions from speculation to sustained policy engagement, the strategic case for MSOX rests on its ability to amplify gains during regulatory clarity while mitigating the risks of its inherently unstable environment.