Mutual Funds Investing in Sin Stocks

Investing in Tobacco, Alcohol and Other 'Sin Stocks'

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You can invest in 'sin stocks' with mutual funds.. Getty Images

People will always sin, so why not invest in it? There are real investment opportunities to be found in so-called sin stocks, and the mutual funds that hold them. In this article, we'll cover the basics of sin stocks and provide examples of mutual funds that tend to have these stocks in their portfolios.

Sin Stocks Definition

Sin stocks are a sub-category of the consumer staples sector, which generally includes products and services that consumers purchase, no matter which direction the economy or stock market is heading.

For example, a recession does not change the consumption levels of tobacco or alcohol as significantly as services and products consumers consider to be less "essential," such as entertainment and hotels.

Therefore sin stocks can be also be considered a sub-category of defensive stocks because they can perform better than the broader market during a significant decline in prices, such as with a bear market.

Sin Stocks, Sector Funds, and Defensive Investing

The basic idea of defensive investing is to protect (defend) against significant declines in share prices that are associated with market corrections. For example, during difficult economic times, consumers typically reduce spending on luxury items, such as entertainment, travel and high end clothing, and buy only what they need, such as food, healthcare, and basic utilities.

Sector funds focus on a specific industry, social objective or industrial sector such as health care, real estate or technology.

Their investment objective is to provide concentrated exposure to specific industry groups, called sectors.

Examples of Mutual Funds That Hold Sin Stocks

A good way to get broad exposure to the Consumer Staples sector is with the diversity and low expenses of an index fund or ETF. One of the best index funds is Vanguard Consumer Staples Index (VCSAX) and among the best ETFs is Consumer Staples Select Sector SPDR (XLP).

If you want direct and concentrated exposure to sin stocks, you can take a look at the aptly named Vice Investor (VICEX), which focuses on these special defensive stocks.

Investors should keep in mind that buying sin stocks and defensive stock mutual funds can be a part of a diversified portfolio and investment strategy, but should not be used as a market timing tool or as a standalone investment.

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