Thematic specialist Defiance ETFs has launched a new ETF targeting companies involved in the ‘next generation of medicine’ – those developing therapeutic solutions using cannabis or psychedelics.
The fund is the first US-listed ETF to target firms developing therapeutic solutions from psychedelics.
The Defiance Next Gen Altered Experience ETF (PSY US) has listed on NYSE Arca and comes with an expense ratio of 0.75%.
Mushrooming market
According to the fund’s sponsors, a growing body of clinical research has demonstrated the potential for psychedelic compounds, such as psilocybin and ketamine, to be effective treatments for a range of medical conditions including mental illness, depression, addiction, and post-traumatic stress disorder (PTSD), amongst many others.
The stage is set, says Defiance. for a major paradigm shift in treating psychopathologies with psychedelic-based treatments poised to play a leading role. In 2018, and again in 2019, the US Food and Drug Administration declared psilocybin a “breakthrough therapy”, signaling its potential to be an enormous disruptor to currently available therapies.
Due to the potential for psychedelics to treat a wide range of psychopathologies, as well as the trend towards deregulation, Canaccord Genuity estimates the market for these therapies could eventually grow to over $100 billion.
PSY is the first ETF in the US to target companies developing psychedelics-based therapies; however, the fund also offers exposure to firms leading the medical repurposing of cannabis, another compund that has the potential to treat a wide range of ailments including chronic pain, MS symptoms, chemotherapy side effects, and many others.
The US, the largest cannabis market globally, recorded legal sales in excess of $17.5bn in 2020 which represents a 46% sales growth year-on-year, according to data from BDSA, an analytics firm focused on the cannabis industry. The industry is, however, expected to ultimately generate $85bn in sales by 2030 with several factors acting as tailwinds. These include the innovative nature of cannabis companies, the trend towards legalization on a federal level, and the importance of the cannabis sector for tax revenue and job creation, both of which are front-of-mind issues for the US government following the economic impact of the Covid-19 pandemic.
Methodology
The fund tracks the BITA Medical Psychedelics, Cannabis, and Ketamine Index which was developed by German index provider BITA. The index selects its constituents from a universe of North America-listed stocks with market capitalizations greater than $75 million and average daily trading volumes above $500,000.
The methodology screens for companies that derive at least 50% of their revenue from business operations linked to the use of psychedelics, medical cannabis, and ketamine for medicinal purposes. This includes pharmaceutical companies developing related treatments as well as firms involved in the cultivation, production, and distribution of psychedelics, cannabis, and ketamine.
Constituents are weighted by float-adjusted market capitalization subject to a single stock cap of 7% and a cumulative cap of 45% on all stocks with weights above 5%. Reconstitution and rebalancing occur on a semi-annual basis.
As of 28 May, three-quarters (74.2%) of the index weight was allocated to companies domiciled in Canada, while a fifth (19.9%) was dedicated to US-domiciled companies. The remaining 6.0% was made up of firms from the UK.
In terms of sub-sector exposure, nearly half (47.4%) of the index was dedicated to cannabis-focused pharmaceutical companies, including those specializing in CDB derivatives, while just over one-third (35.7%) was allocated to firms specializing in psychedelics. The remaining 16.8% was allocated to companies with operations in the cultivation, production, and distribution of psychedelics, cannabis, and ketamine.
Notable positions include Seelos Therapeutics (9.5%), GW Pharmaceuticals (7.1%), Charlottes Web (6.7%), Trulieve Cannabis (6.7%), MindMed (6.4%), Compass Pathways (6.3%), and Columbia Care (6.0%).
Defiance has made a name for itself as being the first to introduce ETFs on disruptive technologies. The firm’s previous launches include the first 5G ETF, first SPAC ETF, and first hydrogen ETF to be listed in the US.