Thursday, 3 September 2009

Proposal for a New ETF: Shunned and Sin Stocks

There are ETFs for just about everything these days. Amongst the country, commodity, sector and bear/bull ETFs, there are Socially Responsible ETFs.

To cater to those who view the SRI funds as political correctness and who love to decry it, in the spirit of equal opportunity I would like to modestly propose the creation of another one that presents the opposite point of view - the Shunned and Sinner Index ETF. One has to admit, it has a certain ring to it, or more precisely, a TWANG - tobacco, weapons, alcohol, nuclear and gambling.

The S&S ETF investor need not sacrifice for his or her unpopular personal point of view. No indeed. In their paper, The Wages of Social Responsibility, found over at the Social Investment Forum (Ah, the world is full of ironies, isn't it. This very paper that won the 2008 Moskowitz Prize for Socially Responsible Investing confirms that you can make money by doing the opposite), researchers Meir Statman and Denys Glushkov found that "... we also find that ‘shunned’ stocks outperformed stocks in other industries". They cite another study by Harrison Hong and Marcin Kacperczyk called the Price of Sin that found "... that the realized returns of ‘sin’ stocks were higher than the returns of other stocks." These 198 baddies stocks include GE (weapons and nuclear), Coca Cola (alcohol ... so that's the secret ingredient!), Altria (tobacco and alcohol) and Harley Davidson (gambling ... really? riding a bike isn't that dangerous).

An S&S ETF would allow investors to add a Mean tilt to their portfolio to supplement the oft-noted Value and Small Cap tilts. It's time to jump in now, before the efficient market discovers the S&S effect and eliminates it through arbitrage.

We can all have our cake and eat it too though, since Meir and Glushkov also found that the SRI approach can do well by focusing on companies with good community and employee relations and high scores on environmental responsibility. Everyone wins, no one loses, now that's politically correct.

How about it, iShares, Powershares, Claymore isn't there an unexploited opportunity and a clientele to be served?


Debarth said...

Money knows no creed, no deed. All's fair in the fight for the greenback. Interesting article.

Charles said...

It was tried and it failed. FocusShares SINdex had insufficient trading volume to justify its existence, and was extinguished last year. I doubt the idea will be lit up again unless someone can provide a convincing explanation of why it'd catch on better the second time.

CanadianInvestor said...

Oh my Gxx, er Devil, Charles, you're right! Sin(dex) didn't catch on last year. That must be a first. Maybe it takes a while for the academic research to percolate into popular consciousness? The Wages paper was only published in Dec.2008, after the closure of PUF (great ticker, huh?). Or maybe it was the timing in conjunction with the crash - when disaster hits, there's a flight to safety and everyone suddenly decides to be virtuous?

Anonymous said...

There is a long-established mutual fund called the Vice Fund that focuses on so-called "sin" stocks:

Charles said...

@Anonymous: Yes, but the Vice Fund is not available to Canadian investors, and as you can clearly see this is a Canadian site :)

CanadianInvestor said...

Thanks, Anon for mentioning the US fund, despite it not being open to Canadians. It is interesting to see how it is doing - seems to have outperformed its chosen benchmark the Russell 1000. The other interesting info it gives amongst its background is that the anti-smoking warnings on packages don't work at all to reduce smoking - see

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