People will always sin, so why not invest in it? There are real investment opportunities to be found in so-called sin stocks and mutual funds or ETFs can be a smart way to gain exposure to this defensive sector. 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 are a sub-category of the consumer staples sector, which often includes things consumers purchase, no matter the economy or stock market.
- Because of their defensive qualities, some investors may hold more sin stocks, or mutual funds that invest in them, before or during a bear market.
- Two of the best consumer staples funds are Vanguard Consumer Staples ETF (VDC) and Consumer Staples Select Sector SPDR (XLP).
- Buying sin stocks can be a part of a diversified portfolio strategy but should not be used as a market timing tool or as a standalone investment.
What Are Sin Stocks?
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. Sin stocks get their name because of the products they often represent, such as tobacco and alcohol.
Sin stocks are often used for defensive purposes because of their relative resilience during economic recessions. 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.
Examples of sin stocks include tobacco companies, such as Philip Morris International (PM), and Molson Coors Beverage Company (TAP). PM has entered into the breakout sin stock arena of the vaping and e-cig industry. Sin stocks may also include casino and gaming companies like Caesars Entertainment Corp (CZR).
Sin Stocks, Sector Funds, and Defensive Investing
Because of their defensive qualities, some investors may hold more sin stocks, or mutual funds that invest in them, before or during a bear market. Investors may use other defensive stock sectors for similar reasons.
More on Sector Funds
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.
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, high-end clothing, and buy only what they need (or items they don't want to stop buying), such as food, healthcare, and basic utilities.
Examples of Mutual Funds and ETFs 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. Two of the best consumer staples funds are Vanguard Consumer Staples ETF (VDC) and Consumer Staples Select Sector SPDR (XLP). Expenses for VDC and XLP are 0.10% and 0.12%, respectively.
If you want more concentrated exposure to sin stocks, you can take a look at the mutual fund, USA Mutuals Vitium Global Fund (VICEX), formerly The Vice Fund, which focuses on aerospace and defense, owners and operators of gaming and casino facilities, tobacco, and alcohol.
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. Adding defensive sectors in relatively small allocations, such as 5-10% of assets, can help to reduce volatility in a portfolio.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.