THCX declared a dividend of approximately 25 cents per share, to be paid June 23 to shareholders of record as of the close of business June 22. With this distribution, THCX’s year-to-date dividend payment amounts to roughly 67 cents per share.
MJ, for its part, paid a dividend of 28 cents per share on June 18, to shareholders of record as of the close of business on June 16. With this last payout, the fund expects to provide its shareholders an annualized yield of 8.17% — 7.42% after deducting MJ’s 0.75% expense ratio.
By back of the envelope calculations, THCX’s annualized yield stands around 6.7% before expenses and fees.
But, how is it possible ETFs are returning money to their shareholders even with their valuations down by double digits (around 20%) since the beginning of the year?
The short answer: the money for the dividend (at least in THCX’s case) is coming from securities lending income, according to Matt Markiewicz, Managing Director of THCX The Cannabis ETF.
What this means is, the fund’s positions are being lent out to borrowers at attractive rates. Since the shareholders of THCX are entitled to the majority of that income earned, this income is being returned in the form of a dividend.
Take into account most cannabis stocks boast stellar borrow rates due to the relatively low market cap and float of many of them. This is a result of a higher-than-normal demand to borrow stocks – either to short or just to trade, coupled with a lower-than-average supply of these stocks.
Compound this with the fact that many cannabis stocks are also heavily shorted and what you get is a very favorable solution for the lender. In this context, ETFs like THCX, can lend shares to an institutional investor even for a few days and generate revenue for its own investors.
“Given the fact that most cannabis companies don't pay a dividend, let alone turn a profit, some cannabis ETFs may offer a unique value proposition as they give investors diverse exposure to a growth theme but with an income component,” Markiewicz told Benzinga.
In fact, in two decades working on Wall Street, Markiewicz hasn’t seen many equity portfolios tilted toward growth industries that offer any meaningful level of yield.
“In this zero interest rate environment, financial advisors are open to out-of-the-box solutions to help provide income for their clients. They just don't know it may exist in a cannabis ETF however,” he said.
Others, instead, have turned to fixed income ETFs which, “thanks to the Fed, have seen record inflows this year – and it's not even July,” Markiewicz added.
“The herd mentality can be a tailwind when those asset prices are going up of course but when the tide goes out, it may not feel so comfortable standing naked on the beach.”
Lead image by Ilona Szentivanyi. Copyright: Benzinga.