Trump's Reclassification: A Tactical Setup for Cannabis ETFs

The specific catalyst is clear: President Trump signed an executive order on December 18, 2025, directing the reclassification of marijuana from Schedule I to Schedule III of the Controlled Substances Act. The stated purpose is to facilitate expanded medical research and acknowledge the drug's medical uses, a move supported by recommendations from the Department of Health and Human Services and the FDA.

The immediate market reaction, however, tells a story of over-enthusiasm followed by a sharp correction. The AdvisorShares Pure U.S. Cannabis ETF (MSOS) saw a massive spike on the day of the announcement, closing at $7.14 on December 18. But that pop was short-lived. By January 8, the price had collapsed to $4.57, a decline of roughly 36% from the post-order high. This violent pullback from the initial euphoria is the market's first, hard assessment of the order's true impact.

Crucially, the order's primary immediate effect is narrow. It is designed to facilitate medical research and may provide certain tax benefits, but it does not legalize marijuana for recreational use or resolve the core banking and financial service restrictions that have long plagued the industry. The market's sell-off suggests investors quickly recalibrated their expectations, realizing this was a step toward research access, not a fundamental shift toward commercial viability.

The Financial Mechanics: Tax Benefit vs. Implementation Risk

The core financial claim driving the initial rally is straightforward: reclassification to Schedule III would allow cannabis companies to deduct standard business expenses under Section 280(e) of the Internal Revenue Code. This is a powerful potential cash flow catalyst, as it would let firms write off costs like rent, payroll, and marketing that are currently non-deductible. The order explicitly states this would be a benefit for medical and recreational marijuana businesses operating under state law. For a sector long burdened by a 20% federal tax penalty, this single change could materially improve profitability.

Yet the path from order to cash flow is fraught with implementation risk. The order itself notes it does not change the risks and related compliance issues for financial institutions that have historically refrained from servicing the industry. This is the critical operational bottleneck. Without a clear signal that banks will provide basic services like checking accounts and credit, the tax benefit remains theoretical for many operators. The market's reaction to this uncertainty was immediate and severe. A leveraged ETF tied to the sector, AdvisorShares MSOS Daily Leveraged ETF (MSOX), saw its Momentum score soar on optimism but then faced a 50.59% pullback due to unclear banking provisions. That violent move underscores where the real risk lies-not in the tax code, but in the banking system's continued reluctance.

The bottom line is a stark contrast between a promised financial benefit and an unresolved operational constraint. The tax deduction is a tangible, if delayed, reward. The banking risk is a persistent, immediate threat that can derail any valuation gains. For now, the setup favors skepticism. The order creates a potential catalyst for cash flow, but until financial institutions signal a change in policy, that benefit remains locked behind a door the market fears is still bolted shut.

The Forward Setup: Catalysts, Risks, and What to Watch

The immediate catalyst is set, but the real test begins now. The executive order mandates the administration to complete the process for reclassifying marijuana under the Controlled Substances Act. This formal rulemaking process is not yet complete and could take months to finalize. For the momentum thesis to hold, investors need to see this bureaucratic machinery move decisively. Any delay or procedural hiccup will provide ammunition for skeptics and likely keep the sector in a state of volatility.

The most significant near-term risk that could deflate any rally is a looming legislative threat. Separately, Congress included a ban in a recent government funding bill that would treat many consumer hemp products as marijuana under federal law. This provision, set to take effect on November 12, 2026, threatens to reverse the 2018 Farm Bill and could decimate the CBD industry. This creates a direct conflict with the administration's stated goal of expanding access to medical marijuana and CBD products. The market will be watching for signs of a policy clash between the executive and legislative branches.

Monitor the price action of the AdvisorShares Pure U.S. Cannabis ETF (MSOS) for signs of sustainability. The stock's wide 52-week range of 2.02 to 7.25 shows extreme volatility. The recent collapse from its post-order high of $7.14 to around $4.57 demonstrates how quickly sentiment can shift. A sustained move above that initial spike would signal the market is pricing in the tax benefit and a path to banking normalization. A failure to hold above key technical levels, or a new drop below the $4.50 range, would confirm the rally was a speculative pop based on policy hope, not fundamental change.

The setup is now a race between two timelines: the slow, uncertain process of reclassification and the looming, hard deadline of the hemp ban. For now, the forward view is one of high risk and high uncertainty.