There are thousands of exchange-traded products listed in the U.S., and as exchange-traded funds mature it is becoming clear that more and more new ETFs can be described as “niche.”
These funds trade on hype, occupying an arguably thin slices of financial markets, and have found mixed success over the years.
Gone are ETFs that offered investors exposure to fisheries, various Christian denominations and those focusing only on companies based in Oklahoma and Texas.
Funds dedicated to emerging markets consumer stocks and lithium stocks, just to name a few niche concepts, are alive and kicking.
Interestingly, it had been a few years since an ETF issuer made a run at a sin stocks fund. That changed earlier this month with the debut of the Spirited Funds/ETFMG Whiskey & Spirits ETF (NYSEARCA:WSKY).
As its name implies, WSKY solves the riddle of how to invest in whiskey without investing in a single stock. However, WSKY is not entirely devoted to whiskey.
What WSKY Is Made Of
The whiskey ETF follows the the Spirited Funds/ETFMG Whiskey & Spirits Index, which in addition to whiskey makers, holds shares of spirit distilleries, breweries and vintners.
While it is too early to judge whether WSKY will be successful, it is fair to say the whiskey ETF epitomizes “niche ETF.” Still, some fundamental factors indicate the whiskey ETF is an idea with merit.
For example, distilled spirit sales nearly hit the $72 billion mark in 2015, and whiskey has become the drink of choice for millennials, outpacing rum and vodka. According to the Distilled Spirits Council, overall supplier sales for spirits wafted up 4.1% as American’s thirst more for bourbon, rye and other whiskeys. American whiskeys, too, grew 7.8% to hit just shy of $3 billion in sales.
According to a statement issued by WSKY’s sponsors on the day the fund debuted:
“In the U.S. alone, High End Premium, and Super-Premium bourbon and Tennessee whiskey brands saw revenues increase 50% and 155%, respectively, in the period 2010-2015, according to the Distilled Spirits Council of the United States. Total U.S. spirits sales were $72 billion in 2015.”
The whiskey ETF checks another important investment box: Tapping into the tastes and potentially rising incomes of millennials (the 18-35 age demographic). Just look at this headline from a Food World News article published in December: “Millennials More than Anyone Are Driving Whiskey Sales.”
Investing in whiskey has a fundamental merit. Data confirm as much, but the whiskey ETF is not perfect. To be fair, aiming for perfection with any ETF can prove to be aiming at moving target, but the whiskey ETF has some risks.
For example, one of the primary reasons to invest in ETFs or index funds is to cap single stock exposure. However, WSKY debuted with more than 23% of its weight devoted to Diageo Plc (ADR) (NYSE:DEO).
Let’s put it this way: If you’ve been involved with a tech ETF that had a 15% weight to Apple Inc. (NASDAQ:AAPL) and that ETF fell because Apple had a bad day, the whiskey ETF by virtue of its Diageo exposure, exposes investors to a similar, potentially more irksome situation.
Second, WSKY charges 0.75% per year, or $75 on a $10,000 investment. That is pricey for nearly any non-leveraged sector ETF, and even more so when considering investors can gobble up the least expensive consumer staples ETF on the market for an annual fee of barely more than $8 per $10,000 invested.
Data indicate whiskey sales are rising. Whether that translates to success for WSKY, time will tell.
At the time of this writing, Todd Shriber did not own any of the aforementioned securities.
