Sin sells, and consumers are buying. Bulking up your portfolio with mutual funds that invest in sin stocks — which include alcohol, tobacco, and gaming — can be a smart defensive play now or a good tool for diversification at any time.
Much like other stocks that are considered to be consumer staples industries, such as healthcare or utilities, sin stocks have a defensive element that enables them to outperform broad market indices, such as the S&P 500 Index, even during recession.
When the economy weakens, consumers tend to cut back their spending on products and services considered to be luxury or high-end, such as automobiles and entertainment, and pay for only what they believe to be necessities, such as pharmaceutical drugs, electricity and beer….
Wait a minute! Beer is a necessity? Perhaps not, but it is an item that consumers are not quick to cut out of their budget, even in difficult financial times.
If you’re not quite convinced about the wisdom of investing in sin stocks, check out these 3 mutual funds that are sinfully attractive:
The Vice Fund: USA Barrier Mutuals Investor (VICEX)
If you need evidence that consumers can’t live without their “sinful” products and services, look no further than USA Barrier Mutuals Investor (VICEX), also known as “Vice Investor.” Top holdings include tobacco companies like Altria (MO) and the casino gambling resort giant, MGM Resorts International (MGM).
VICEX is the only pure sin stock mutual fund with a long track record, which makes it a good reference for comparing the performance of sin stocks vs the S&P 500. VICEX has a 10-year annualized return of 10.4%, compared to the S&P’s 8.2%.
As with any investment, don’t expect to use VICEX (or other mutual funds investing in sin stocks) as a market-timing tool. However, there can be better times than others to hold sin stocks. For example, in 2007, the year leading up to the last recession and bear market, VICEX gained 17.8% and the S&P climbed just 12.3%. However, in 2009, when stocks were rebounding off of bear market lows, VICEX put in a 12.7% gain but the S&P 500 Index advanced 26.5%.
Therefore, VICEX could be a worthy addition to your portfolio now, if you believe a recession is around the corner. To buy VICEX, the minimum initial purchase of $2000 is affordable. The expense ratio is a bit pricey at 1.64% but the best of sin stocks may be worth it!
Fidelity Select Consumer Staples (FDFAX)
If you want a healthy dose of sin stocks without full exposure, Fidelity Select Consumer Staples (FDFAX) can be a good choice for you. In fact, before including consumer staples in its moniker, this fund was initially named “Fidelity Select Food & Agriculture Portfolio” and then changed its name to “Fidelity Select Leisure,” which are nicer ways of saying “Fidelity Select Sin.”
FDFAX recently kept more than 20% of its portfolio in alcohol and tobacco stocks. You’ll also get foreign stock exposure, with nearly 30% of holding in non-US companies. However, the added risk has translated to an impressive long-term performance of 11.6% for the 10-year annualized return.
Minimum initial purchase is $2500, and the expense ratio will only set you back 0.79%.
Rydex Leisure Inv (RYLIX)
Rydex Leisure Inv (RYLIX) is a sin stock fund that also mixes in companies like Starbucks (SBUX) and McDonalds (MCD) that can be considered somewhat sinful but find themselves more aligned with cyclical stocks, which gives RYLIX a slightly different composition than other sin stock funds.
For example, RYLIX jumped 42.8% in 2013, which beats the 32.4% gain in the S&P 500 Index. However, in the midst of the 2008 bear market, RYLIX fell -49.3%, compared to the loss in the S&P 500 of -37.0%. This is where the cyclical stocks can drag on performance. So if you want a sin stock fund that leans more toward pleasure and leisure, RYLIX can work for you.
The minimum initial investment for RYLIX is $2500 and the expense ratio is 1.35%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.