Sin as investment strategy

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
larryswedroe
Posts: 15711
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Sin as investment strategy

Post by larryswedroe » Wed Jun 29, 2016 2:14 pm

http://mutualfunds.com/education/sin-as ... -strategy/
The opposite of SRI

Hope you find this of interest---shows the potential loss of returns to SRI screens

Larry

User avatar
nedsaid
Posts: 10483
Joined: Fri Nov 23, 2012 12:33 pm

Re: Sin as investment strategy

Post by nedsaid » Wed Jun 29, 2016 2:41 pm

So I guess that we need to add sin as another investing factor. What we really need is a small value sin index ETF that we can invest in.
A fool and his money are good for business.

User avatar
AtlasShrugged?
Posts: 608
Joined: Wed Jul 15, 2015 6:08 pm

Re: Sin as investment strategy

Post by AtlasShrugged? » Wed Jun 29, 2016 2:48 pm

A pity that there is not a 'sin-based' index fund....
“If you don't know, the thing to do is not to get scared, but to learn.”

lgs88
Posts: 235
Joined: Tue Jun 07, 2016 7:48 am

Re: Sin as investment strategy

Post by lgs88 » Wed Jun 29, 2016 3:38 pm

Vanguard's Social Index has had rather sub-par results since its founding in 2000.
merely an interested amateur

sciliz
Posts: 58
Joined: Thu Feb 19, 2015 12:21 pm

Re: Sin as investment strategy

Post by sciliz » Wed Jun 29, 2016 3:50 pm

I *love* the ticker VICEX.
And an ER of 1.48? Finally, truth in advertising.

SGM
Posts: 2740
Joined: Wed Mar 23, 2011 4:46 am

Re: Sin as investment strategy

Post by SGM » Wed Jun 29, 2016 5:01 pm

Thankfully VTI the total stock market includes "sin" stocks. I happily invest in legal corporations that make legal products to meet the needs of consumers. I have always considered "sin free" investing to be a lot of noise. I may have sins but investing in the total market is not one of them. Someone told me last weekend that delaying SS until 70 is a sign of hypocrisy. :?:

User avatar
LadyGeek
Site Admin
Posts: 48533
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Sin as investment strategy

Post by LadyGeek » Thu Jun 30, 2016 3:00 pm

The wiki has some related background info for the "opposite" approach: Social responsibility indices
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

garlandwhizzer
Posts: 2013
Joined: Fri Aug 06, 2010 3:42 pm

Re: Sin as investment strategy

Post by garlandwhizzer » Thu Jun 30, 2016 6:30 pm

It appears that in aggregate investors hold a certain stigma for sin stocks. That unpopularity in turn drives their improved fundamentals and, hence, their improved performance. I doubt that this is solely due to socially responsible investing etfs because sin stock outperformance existed before such morally upright etfs became popular. Likely a number of investors, enough to make a difference, hold a moral/political bias against owning sin stocks and profiting from their operations. I find it oddly comforting to know that in the dog-eat-dog financial world, where results seem to be all that matters, some still draw the line based on their moral compass. I personally know an investor who refuses to buy tobacco company stocks because his mother, a lifelong smoker, died of lung cancer in her 50s. It appears to be easy to set up a sin stock portfolio, just buy and hold stocks in those industries and history suggests you would profit from it relative to indexes. However, this has not been a popular approach for either individual investors or etf providers which is why the sin premium persists. I believe also that the sin premium is a lot more consistent over time than some other premiums which may come and go for decades at a time.

Garland Whizzer

Tanelorn
Posts: 1546
Joined: Thu May 01, 2014 9:35 pm

Re: Sin as investment strategy

Post by Tanelorn » Thu Jun 30, 2016 6:47 pm

Thanks for the article. I remember VICEX, didn't know how well they were doing.
If we expand the analysis to include the quality and low-beta factors, the alpha becomes negative (though not statistically significant) at 0.77 percent, which would still be a positive 0.67 percent on a gross basis. At least before VICEX’s very high expenses, sin investing was rewarded. Perhaps what interested investors need is a less-sinful version of the fund (at least in terms of expense).
Can you explain this last part of the article? I don't quite understand it.

larryswedroe
Posts: 15711
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Sin as investment strategy

Post by larryswedroe » Thu Jun 30, 2016 7:31 pm

Tanelorn
Sure, alpha is the return that is unexplained by the factors. So part of that is the ER of course, which is obviously a negative. So the alpha gross of expenses will be the result of the regression PLUS adding back in the ER of the fund. But of course investors earn NET, not GROSS returns.

So let's assume the regression shows an alpha of -1%. And the fund has an ER of 2%. The GROSS alpha would have been 1%, and if the fund had instead an ER of say 0.5%, it would have an alpha of 0.5%.

In this case the NET alpha was -.77, which was due to the very high ER of the fund. Any ER less than 0.77 would have resulted in a net positive alpha.
Larry

HomoLudens
Posts: 119
Joined: Sat Oct 31, 2015 8:27 pm

Re: Sin as investment strategy

Post by HomoLudens » Thu Jun 30, 2016 7:56 pm

JCE66 wrote:A pity that there is not a 'sin-based' index fund....
It's a pity indeed. I can easily imagine "sin-growth" and "sin-value" funds. :happy
"'Thoughts without content are empty, intuitions without concepts are blind." Immanuel Kant

Tanelorn
Posts: 1546
Joined: Thu May 01, 2014 9:35 pm

Re: Sin as investment strategy

Post by Tanelorn » Thu Jun 30, 2016 11:21 pm

larryswedroe wrote:Tanelorn
In this case the NET alpha was -.77, which was due to the very high ER of the fund. Any ER less than 0.77 would have resulted in a net positive alpha.
Larry
I see, thank you Larry. The part above is saying the 6 factor adjusted post-ER alpha of the strategy was -0.77%, but the 6 factor adjusted pre-ER alpha was +0.67%. Interesting that these secondary factor adjustments (quality, low beta) account for so much of the outperformance, ie the pre-ER 4 factor alpha was slightly over +3.0%.

So to summarize (if I understood correctly), there has been roughly 0.7% worth of "sin" alpha and +2.3% of quality/low beta factor exposure. Maybe those guys in the marketing departments are onto something with those new factors ;)

I wonder if they can broaden their definition to include other businesses no one wants to own, like timeshare companies. I felt a little bad owning Diamond Resorts (DRII), but now that Apollo wants to buy them for a 25% premium, I'm happily no longer a shareholder.

On a more practical note, roughly 80% of the holdings of VICEX are in their top 25 stocks. As these are all large cap US stocks or ADRs, it would be fairly easy to make a "motif" basket out of these and buy nearly the whole thing for $10 over at Motif Investing. Saving the 1.5% ER isn't that hard these days via direct ownership and it would sure cut down on the costs.

User avatar
9-5 Suited
Posts: 241
Joined: Thu Jun 23, 2016 12:14 pm

Re: Sin as investment strategy

Post by 9-5 Suited » Fri Jul 01, 2016 12:43 am

The article lists smoking, drinking, and gambling stocks as being sin qualifiers.

The smoking one makes intuitive sense - a lot of people don't want to touch that. But drinking? I have a hard time thinking there's a large Prohibition segment of investors out there opposed to owning shares of beer and spirit companies for moral reasons.

Can't wait until some of these marijuana states have companies that go public :) A whole other sector to add to the index!

larryswedroe
Posts: 15711
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Sin as investment strategy

Post by larryswedroe » Fri Jul 01, 2016 8:44 am

Tanelorn, you have it correct
Larry

cpw84
Posts: 132
Joined: Thu Mar 17, 2016 2:12 pm

Re: Sin as investment strategy

Post by cpw84 » Fri Jul 01, 2016 8:54 am

9-5 Suited wrote:The article lists smoking, drinking, and gambling stocks as being sin qualifiers.

The smoking one makes intuitive sense - a lot of people don't want to touch that. But drinking? I have a hard time thinking there's a large Prohibition segment of investors out there opposed to owning shares of beer and spirit companies for moral reasons.

Can't wait until some of these marijuana states have companies that go public :) A whole other sector to add to the index!
That's one of the problems I see with SRI funds (besides the returns). It doesn't seem like an option to do an a la carte fund without doing it yourself. And even if the option was offered, the fees would be understandably high. I personally do not see nuclear power as a sin investment or inherently anti-environmental, but they are excluded from many SRI funds.

I love the idea, and sometimes question the morality of investing in certain stocks as part of an index, but it's hard to do it in a cost efficient way and make sure you are still properly diversified.

User avatar
nedsaid
Posts: 10483
Joined: Fri Nov 23, 2012 12:33 pm

Re: Sin as investment strategy

Post by nedsaid » Fri Jul 01, 2016 11:33 am

larryswedroe wrote:Tanelorn
Sure, alpha is the return that is unexplained by the factors. So part of that is the ER of course, which is obviously a negative. So the alpha gross of expenses will be the result of the regression PLUS adding back in the ER of the fund. But of course investors earn NET, not GROSS returns.

So let's assume the regression shows an alpha of -1%. And the fund has an ER of 2%. The GROSS alpha would have been 1%, and if the fund had instead an ER of say 0.5%, it would have an alpha of 0.5%.

In this case the NET alpha was -.77, which was due to the very high ER of the fund. Any ER less than 0.77 would have resulted in a net positive alpha.
Larry
Larry, your thinking is correct. However, we have all but said that "sin" is a factor. Taking into account the higher future expected returns of sin, wouldn't whatever alpha is there shrink even further?
A fool and his money are good for business.

BigMoneyNoWhammies
Posts: 132
Joined: Tue Jul 11, 2017 11:58 am

Re: Sin as investment strategy

Post by BigMoneyNoWhammies » Thu Oct 18, 2018 9:42 am

Larry,

Sin stock investing as a factor has been on my mind off and on the last couple years, and I came across this post of yours from a few years ago (thank you for posting the link). In the years since, have you come across any reasonably analogous alternative to VICEX, hopefully one with an ER lower than the 1.49% VICEX sports?

Valuethinker
Posts: 36314
Joined: Fri May 11, 2007 11:07 am

Re: Sin as investment strategy

Post by Valuethinker » Thu Oct 18, 2018 10:11 am

BigMoneyNoWhammies wrote:
Thu Oct 18, 2018 9:42 am
Larry,

Sin stock investing as a factor has been on my mind off and on the last couple years, and I came across this post of yours from a few years ago (thank you for posting the link). In the years since, have you come across any reasonably analogous alternative to VICEX, hopefully one with an ER lower than the 1.49% VICEX sports?
https://www.nasdaq.com/article/tobacco- ... s-cm952199

consumer staples ETFs would have tobacco exposure, as above. The UK equivalent would have 2 major tobacco stocks (BAT and Imperial) and also drinks (Diageo).

https://investorplace.com/2017/12/etfs- ... ight-dark/

BigMoneyNoWhammies
Posts: 132
Joined: Tue Jul 11, 2017 11:58 am

Re: Sin as investment strategy

Post by BigMoneyNoWhammies » Thu Oct 18, 2018 10:29 am

Valuethinker wrote:
Thu Oct 18, 2018 10:11 am
BigMoneyNoWhammies wrote:
Thu Oct 18, 2018 9:42 am
Larry,

Sin stock investing as a factor has been on my mind off and on the last couple years, and I came across this post of yours from a few years ago (thank you for posting the link). In the years since, have you come across any reasonably analogous alternative to VICEX, hopefully one with an ER lower than the 1.49% VICEX sports?
https://www.nasdaq.com/article/tobacco- ... s-cm952199

consumer staples ETFs would have tobacco exposure, as above. The UK equivalent would have 2 major tobacco stocks (BAT and Imperial) and also drinks (Diageo).

https://investorplace.com/2017/12/etfs- ... ight-dark/
Thank you for the input, Valuethinker. i'll look into consumer staples more deeply.

NoHeat
Posts: 195
Joined: Sun Sep 18, 2016 10:13 am

Re: Sin as investment strategy

Post by NoHeat » Thu Oct 18, 2018 10:52 am

BigMoneyNoWhammies wrote:
Thu Oct 18, 2018 9:42 am

Sin stock investing ... any reasonably analogous alternative to VICEX, hopefully one with an ER lower than the 1.49% VICEX sports?
Besides tobacco and alcohol, VICEX includes defense stocks and casinos.

A consumer-staples sector fund, can be a low-fee way to go, but it's nowhere close to a pure play, as it will include food, household products, and retailers.

If what you want is tobacco equity, I'd just buy a tobacco stock or two, and avoid fund fees. The industry is heavily concentrated into just a few names, so there's no need for a fund. BTI, PM, MO are big tobacco companies, where MO is mostly for US sales, while the others are more international. These stocks happen to have badly beaten up prices right now, by the way, with correspondingly high dividend rates. The dividend rate for MO for example has climbed from 3.3% in March 2017 to 5.3% now. An often-mentioned concern, which might be behind the falling stock prices, is an expectation that vaping will wipe out profits for tobacco companies, although earnings are still strong at this point.

If what you want is alcohol, again, you could just buy a stock or two.

cheezit
Posts: 50
Joined: Sat Jul 14, 2018 7:28 pm

Re: Sin as investment strategy

Post by cheezit » Thu Oct 18, 2018 3:05 pm

9-5 Suited wrote:
Fri Jul 01, 2016 12:43 am
The article lists smoking, drinking, and gambling stocks as being sin qualifiers.

The smoking one makes intuitive sense - a lot of people don't want to touch that. But drinking? I have a hard time thinking there's a large Prohibition segment of investors out there opposed to owning shares of beer and spirit companies for moral reasons.

Can't wait until some of these marijuana states have companies that go public :) A whole other sector to add to the index!
(emphasis added)

I've run into plenty of neo-Prohibitionists online, and a huge number of folks who don't want to invest in companies that make other legal things that they object to (firearms are the most common).

Of more interest to me is how Vanguard and other large index fund providers will react to pressure from special interest groups to use their shares to gimp various companies. I can definitely see a future where an ostensibly-anti-drunk-driving group starts a social media campaign for Vanguard and Fidelity to vote Yes on a shareholder motion for Diageo to limit the alcohol content of their beers to 1% by volume, writes op-eds that get published in leading "prestige" periodicals calling for them to do so, leaves a bunch of threatening messages in Abigail Johnson's voicemail inbox, pays a hacker to doxx Mortimer Buckley and sends "grassroots activists" to scream at his kids while they're walking to the school bus stop that their daddy is a murder, and other steps like these to ratchet up the pressure (probably with a thin veneer that this is actually a matter of fiduciary duty).

User avatar
dm200
Posts: 18743
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Sin as investment strategy

Post by dm200 » Thu Oct 18, 2018 3:11 pm

Over the decades, the tobacco stocks had been among the most profitable investments.

edgeagg
Posts: 105
Joined: Tue Jan 23, 2018 1:27 pm
Location: WA-US

Re: Sin as investment strategy

Post by edgeagg » Thu Oct 18, 2018 3:24 pm

So what am I missing wrt VICEX. Comparison in Portfolio Analyzer over the last 10 years shows no real advantage, nor does it over a longer period

User avatar
linenfort
Posts: 2140
Joined: Sat Sep 22, 2007 9:22 am
Location: #96151D

Re: Sin as investment strategy

Post by linenfort » Thu Oct 18, 2018 4:00 pm

There are some. See the profile of ticker ACT in Yahoo Finance.

I remember an older one, I think, but perhaps it was just a suggestion and not a real ETF: had cigarettes, alcohol, casinos and an arms manufacturer (ATK).
I've been holding Philip Morris, Diageo, and Big Oil forever. And aerospace- I guess those count as arms manufacturers.
bogleheads, don't knock state lotteries. They helped defund the mafia.

BigMoneyNoWhammies
Posts: 132
Joined: Tue Jul 11, 2017 11:58 am

Re: Sin as investment strategy

Post by BigMoneyNoWhammies » Thu Oct 18, 2018 4:17 pm

edgeagg wrote:
Thu Oct 18, 2018 3:24 pm
So what am I missing wrt VICEX. Comparison in Portfolio Analyzer over the last 10 years shows no real advantage, nor does it over a longer period
My guess is this would be due to the high ER, but that's just a guess

BigMoneyNoWhammies
Posts: 132
Joined: Tue Jul 11, 2017 11:58 am

Re: Sin as investment strategy

Post by BigMoneyNoWhammies » Thu Oct 18, 2018 4:19 pm

cheezit wrote:
Thu Oct 18, 2018 3:05 pm
9-5 Suited wrote:
Fri Jul 01, 2016 12:43 am
The article lists smoking, drinking, and gambling stocks as being sin qualifiers.

The smoking one makes intuitive sense - a lot of people don't want to touch that. But drinking? I have a hard time thinking there's a large Prohibition segment of investors out there opposed to owning shares of beer and spirit companies for moral reasons.

Can't wait until some of these marijuana states have companies that go public :) A whole other sector to add to the index!
(emphasis added)

I've run into plenty of neo-Prohibitionists online, and a huge number of folks who don't want to invest in companies that make other legal things that they object to (firearms are the most common).

Of more interest to me is how Vanguard and other large index fund providers will react to pressure from special interest groups to use their shares to gimp various companies. I can definitely see a future where an ostensibly-anti-drunk-driving group starts a social media campaign for Vanguard and Fidelity to vote Yes on a shareholder motion for Diageo to limit the alcohol content of their beers to 1% by volume, writes op-eds that get published in leading "prestige" periodicals calling for them to do so, leaves a bunch of threatening messages in Abigail Johnson's voicemail inbox, pays a hacker to doxx Mortimer Buckley and sends "grassroots activists" to scream at his kids while they're walking to the school bus stop that their daddy is a murder, and other steps like these to ratchet up the pressure (probably with a thin veneer that this is actually a matter of fiduciary duty).
I worry about this as well, especially as passive index investing continues to grow and Fido, Blackrock, and VG hold larger and larger percentages of companies via their funds.

Tanelorn
Posts: 1546
Joined: Thu May 01, 2014 9:35 pm

Re: Sin as investment strategy

Post by Tanelorn » Thu Oct 18, 2018 6:22 pm

cheezit wrote:
Thu Oct 18, 2018 3:05 pm
Of more interest to me is how Vanguard and other large index fund providers will react to pressure from special interest groups to use their shares to gimp various companies. I can definitely see a future where an ostensibly-anti-drunk-driving group starts a social media campaign for Vanguard and Fidelity to vote Yes on a shareholder motion for Diageo to limit the alcohol content of their beers to 1% by volume, writes op-eds that get published in leading "prestige" periodicals calling for them to do so, leaves a bunch of threatening messages in Abigail Johnson's voicemail inbox, pays a hacker to doxx Mortimer Buckley and sends "grassroots activists" to scream at his kids while they're walking to the school bus stop that their daddy is a murder, and other steps like these to ratchet up the pressure (probably with a thin veneer that this is actually a matter of fiduciary duty).
This is a real risk the way politics are going these days and similar things are already happening. I’m not sure whether the pressure is external or internal or perceived marketing to the current sensibilities, but already BlackRock and State Street are using their customers’ huge shareholdings to bully companies to have “more diverse” board members and voting against their directors and other company matters if they don’t comply. As a shareholder, I want the company to have the best qualified and experienced board members looking after my investment and I don’t care who they are.

Post Reply