How to play cannabis stocks in 2026

Key Concepts

• Rescheduling of Cannabis: Moving cannabis from Schedule I to Schedule III under the DEA classification, impacting taxation, banking, and research.
• 280E Tax Code: A federal tax code provision that prevents cannabis companies from deducting normal business expenses, leading to significantly higher tax burdens.
• Safe Banking Act: Proposed legislation aiming to provide safe harbor for financial institutions to work with cannabis businesses.
• MORE Act: Another proposed federal cannabis reform bill, aiming for broader legalization and expungement of records.
• MSOS ETF: AdvisorShares Pure US Cannabis ETF – an actively managed exchange-traded fund focused on US cannabis companies.
• OTC Markets: “Over-the-Counter” markets where many US cannabis companies currently trade due to exchange restrictions.

Cannabis Industry Outlook for 2026: A Detailed Analysis

Introduction

The cannabis industry concluded 2025 with positive momentum, as evidenced by the AdvisorShares Pure US Cannabis ETF (MSOS) outperforming the S&P 500. A pivotal moment was President Trump’s executive order directing the Department of Justice (DOJ) to expedite the rescheduling of cannabis to Schedule III, a classification reserved for substances with potential medical applications and eligible for FDA approval. This development is considered the most significant federal cannabis policy shift in over 50 years, and this analysis details the implications for investors in 2026.

The Significance of Cannabis Rescheduling

Currently, cannabis is classified as a Schedule I drug, alongside substances deemed to have no medical use and high potential for abuse. Dan Arenss, Portfolio Manager of MSOS, emphasizes that this classification is inappropriate, given the existing multi-billion dollar cannabis industry operating on a state-by-state basis. The primary impediment to growth for US cannabis companies is their inability to list on major stock exchanges, access traditional banking services, and deduct standard business expenses due to federal prohibition. Rescheduling to Schedule III is expected to alleviate these issues, opening up opportunities for business expansion and increased medical research. As Arenss stated, “cannabis shouldn’t be a schedule one drug. It never should have been there.”

280E Tax Relief and Financial Impact

A major benefit of rescheduling is the potential elimination of Section 280E of the Internal Revenue Code. This provision currently subjects US cannabis companies to extremely high tax rates by disallowing all ordinary business expenses – including payroll, rent, and mortgages – from being deducted. Canadian cannabis companies, not subject to these restrictions, can list on major exchanges like NASDAQ and the New York Stock Exchange. Removing 280E would significantly improve the financial health of US cannabis companies. While the exact implementation and potential retroactive application of the tax relief are still uncertain, the potential impact is substantial. Some companies have accumulated unpaid tax bills anticipating this change.

Regulatory Risks and Potential Roadblocks

Despite the positive outlook, significant regulatory risks remain. Investors are wary due to past disappointments with failed legislative efforts like the SAFE Banking Act and the MORE Act. Arenss highlights the need for caution, noting that investors are “waiting until it’s real, waiting until it’s signed.” Key uncertainties include:

• Safe Harbor for Banking: Whether the rescheduling will automatically provide legal protection for banks serving the cannabis industry.
• Timing of Banking Legislation: The speed at which Congress will pass legislation addressing banking concerns.
• Exchange Listing: The timeline for US cannabis companies to become eligible for listing on major stock exchanges like NASDAQ and the NYSE.
• Guidance on Adult Use Programs: Clarity from the DOJ regarding the regulation of adult-use cannabis programs across different states.

Arenss views the process as “a multi-leg process…a big pop probably when we get the rescheduling, then maybe some volatility, maybe some pullback, and then multiple steps of figuring out banking, uplifting, um medical programs versus adult use recreational programs.” He cautions investors to understand the risks and volatility associated with the cannabis sector.

Market Volatility and Investment Considerations

The cannabis market has historically been highly volatile, even with the recent outperformance of the MSOS ETF. Arenss acknowledges this volatility, stating that cannabis has been “the most volatile place to invest in the past year.” He stresses the importance of investors understanding the risks before investing in the sector.

The MSOS ETF: A Distinct Investment Vehicle

The AdvisorShares Pure US Cannabis ETF (MSOS) is the largest cannabis fund currently available. Its key differentiators include:

• Liquidity: High trading volume, facilitating options trading.
• Active Management: Unlike index funds, MSOS is actively managed, allowing the portfolio manager to make strategic investment decisions. Arenss clarifies that the active management isn’t about frequent trading but about avoiding the pitfalls of market-cap weighted indexes in a unique sector like cannabis.
• Portfolio Composition: The fund is heavily weighted towards the largest, most liquid, and successful US cannabis companies, with some exposure to smaller companies with potential for growth.
• Low Turnover: The fund maintains a relatively stable portfolio, minimizing transaction costs.

As of the interview, MSOS had increased by approximately 40% over the past year.

Data and Statistics

• MSOS ETF Performance: Outperformed the S&P 500 in 2025.
• MSOS ETF Growth: Up approximately 40% over the past year.
• 280E Impact: Cannabis companies are currently unable to deduct any business expenses due to this tax code.

Conclusion

The rescheduling of cannabis to Schedule III represents a potentially transformative moment for the US cannabis industry. While significant regulatory hurdles remain, the prospect of 280E tax relief, improved access to banking, and potential exchange listings offers substantial opportunities for growth. However, investors should be aware of the inherent volatility of the sector and proceed with caution, understanding the risks involved. The process is expected to unfold in stages, with potential for both gains and setbacks along the way. The MSOS ETF, with its active management and focus on established US cannabis companies, provides a distinct investment vehicle for navigating this evolving landscape.