Sin stocks are stocks of companies that are active in industries that many consider are making money from exploiting people’s weaknesses. Stocks of these industries have been found to outperform other stocks. Sin stocks are often the stocks that are excluded from portfolios that invest in a socially responsible manner. Portfolios that exclude sin industries are investing in a way that is referred to as SRI or ESG. SRI stands for Socially Responsible Investing and ESG stands for Environmental, Social, and Governance. For more information on ESG, see ESG factors.
On this page, we discuss investing in sin stocks, whether there are any sin stock funds or sin stock indices. Finally, we also discuss these stocks’ performance.
Sin stocks definition
The exact definition of sin stocks varies. Industries that are always considered vice are tobacco companies, gambling companies, and producers of alcoholic beverages. Then there are the industries that some consider to be vice industries, but other don’t consider to be vice industries. These industries are the defense industry, companies in the energy sector that use nuclear power to generate electricity, and the adult industry.
Sin stocks’ performance
Next, there is the performance of such stocks. There are a number of potential explanations of why sin stocks tend to outperform the general market. One obvious explanation is that these stocks require a higher rate of return to convince investors. Because most investors shy away from vice industries, these companies are forced to pay higher dividends to convince investors to invest money with them. Another possible reason for these stocks’ strong performance is that fact that demand for their products is less elastic. That is, demand is more stable and sin companies can more easily increase prices if needed. Thus, these companies’ profit margins are more stable.
A more recent explanation for the sin stock effect argues that sin stocks are simply companies with fundamentals that earn a risk premium predicted by a multifactor model. In fact, recent research by David Blitz and Frank Fabozzi argues that sin industries earn high returns simply because they are strongly exposed to the ‘profitability’ and ‘investment’ factor in the Fama and French 5 factor model.
Investing in sin stocks
That leaves the question on how to invest in sin stocks? Today, no sin stock index ETFs are available. Also there are very few sin stock mutual funds available out there. At the same time, it is fairly straightforward to identify these stocks. Stocks active in any of the industries reported above are sin stocks to buy. A sin portfolio may consist of an equal-weighted portfolio of companies such as Diageo, Swedish Match, AB Inbev,… and so on.
We discussed the existence of sin companies. The increasing popularity of SRI and ESG investing may lead to a continued good performance of sin companies in the future. With more and more investors shying away from these companies, investors may earn high returns if they are willing to own these stocks.