Vice stocks have always been a popular investment theme, and some funds manage to track it with great precision. Although the USA Mutuals Vice Fund has since been renamed the USA Mutuals Vitium Global Investor (MUTF:VICEX), its initial vice theme remains intact, but it now invests in sin stocks from around the world, and not just those listed in the U.S. While the fund’s performance in recent years hasn’t been all that great, I thought I’d follow on that theme by finding seven vice ETFs to buy.
I wish I could tell you I’ve written extensively about sin stocks, but except for the occasional article about cigarette companies, I’m somewhat of a rank novice. So, the idea of finding seven vice ETFs feels like a nice challenge. That said, except for VICEX, I don’t know of any vice funds.
Thankfully, Investorplace contributor Todd Shriber wrote an article two years ago with five vice-ETFs worth considering. That will give me a good place to start. In 2019, another colleague, Josh Enomoto, wrote about 10 vice stocks to own. With some helpful direction from Todd and Josh, I pulled together a thematic list of seven vice ETFs to buy:
- AdvisorShares Vice ETF (NASDAQ:ACT)
- ETFMG Alternative Harvest ETF (NYSEARCA:MJ)
- VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO)
- The Long -Term Care ETF (NASDAQ:OLD)
- VanEck Vectors Gaming ETF (NASDAQ:BJK)
- iShares U.S. Energy ETF (NYSEARCA:IYE)
- SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR)
Let’s look at what makes each of these worth your attention.
Vice ETFs to Buy: AdvisorShares Vice ETF (ACT)
If there is an ETF that represents the rarefied world of vice stocks, this AdvisorShares actively managed ACT ETF would have to be it. Heck, vice is right there in the name of the fund.
Advisor Shares makes four arguments why you should invest in ACT.
- For starters, alcohol and tobacco stocks have historically delivered above-average long-term returns for investors through multiple market cycles. In recent years, cannabis stocks have added to the allure.
- One of the reasons alcohol and tobacco stocks have performed well has to do with their relatively high profit-margins in the consumer products sector.
- Thirdly, and I can attest to this, ACT is the only ETF, passive or active, that provides a concentrated portfolio of stocks in these three industries.
- It has an experienced portfolio management team. Dan Ahrens, the managing director of AdvisorShares, has managed the fund since 2008.
Cannabis stocks account for 39.9% of the fund’s $10.4 million in total net assets. Alcohol stocks are the second-largest sector allocation with a 25.4% weighting.
Interestingly, the InvestorPlace staff picked ACT as the best ETF for 2020. Unfortunately, it’s currently in the eighth spot, with a current loss of 9%.
ETFMG Alternative Harvest ETF (MJ)
InvestorPlace contributor Tim Biggam picked MJ, the largest cannabis ETF listed in the U.S., as his selection as best ETF for InvestorPlace’s 2020 contest. Unfortunately, MJ is performing even worse than ACT in 2020, down 22% year to date through June 22.
However, given the ETF had down years in 2018 and 2019, it’s easy to understand why Biggam made the selection:
“Cannabis has now become an accepted part of society and will likely remain so in the future. The ability to buy into an industry at the formative stages makes MJ a solid addition to the portfolio. Given that it is trading near all-time lows while stocks generally are at all-time highs makes it all that much better,” Biggam wrote in December.
It’s hard to imagine that MJ will continue to underperform over the next 2.5 years. At some point, it has got to come around. That’s especially true when you consider marijuana sales during the novel coronavirus pandemic have accelerated.
“Marijuana sales since the coronavirus crisis echo that sentiment. Recreational sales have increased by 50% in the past week while medical sales have nearly kept pace with an increase of 41%, according to Flowhub. Cannabis lines have formed, joining guns, liquor and toilet paper as must-have items to help ride out the stay at home orders,” Biggam wrote at the end of March.
Of the seven ETFs on this list, MJ is the ETF I believe has the most upside potential. Still, first it needs to deliver several months of positive returns to get investors excited about cannabis stocks again.
VanEck Vectors Video Gaming and eSports ETF (ESPO)
The VanEck ETF tracks the performance of the MVIS Global Video Gaming and eSports Index, which invests in the stocks of companies involved in the development of video games, esports and related hardware and software.
The younger generation has become much more involved in playing video games and that’s sparked an interest in esports, the act of video gamers playing against each other in a competitive environment. Older generations, such as the boomers, might consider this activity a slothful endeavor, thereby making the companies involved in its growth, legitimate vice ETF holdings.
However, there is no question ESPO’s top 10 holdings are an excellent group of stocks. Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and Activision Blizzard (NASDAQ:ATVI) have an average YTD total return of 35%. The ETF itself has a YTD total return of 33.7%, significantly higher than the entire U.S. markets.
According to VanEck, the competitive video gaming audience on a global basis was expected to hit more than 450 million people in 2019. Further, esports revenues have been growing by more than 27% annually since 2015.
If there is an ETF that equals or betters MJ’s potential, it would have to be ESPO.
The Long -Term Care ETF (OLD)
Given what has happened at long-term care facilities in the U.S. and around the world during Covid-19, I thought I would include Janus Henderson’s thematic ETF in my group of seven vice ETFs to buy.
OLD tracks the performance of the Solactive Long-Term Care Index. The index invests in the stocks of companies that are expected to benefit from the providing of long-term care to the elderly.
While there’s no question that we are living longer and the U.S. need for long-term care continues to grow — it’s estimated to be worth $550 billion annually — the pandemic has exposed the ugly underbelly of this kind of institutionalized care. It’s hard to know where the industry will go next.
Will all long-term care be delivered in people’s homes, no matter how old and infirm they get? Quite possibly. However, if you look at OLD’s top 10 holdings, you will see that at least three of the stocks: LHC Group (NASDAQ:LHCG), Amedisys (NASDAQ:AMED) and Orpea (OTCMKTS:ORPEF), generate significant revenue from home healthcare services.
Thanks to Covid-19, the long-term care industry has gone under a microscope. Whatever solutions governments, non-profit agencies and private businesses come up with to fix the systemic issues that plague this area of health care, the ETF will ride those tailwinds to success.
It’s a diamond in the rough.
VanEck Vectors Gaming ETF (BJK)
Personally, when done responsibly, I don’t believe gaming is a vice, but rather a form of entertainment. However, because 2-3% of Americans are considered problem gamblers and the cost of problem gambling amounts to more than $17 billion annually, it’s easy to see why so many do view it as a vice.
As VanEck ETFs go, the company’s Gaming ETF is relatively small in terms of the assets it has gathered since its inception in January 2008. Currently, it has total assets of $47.5 million, much less than many of its top funds. VanEck has eight ETFs with assets greater than $1 billion. It’s tiny by comparison.
The biggest thing that would keep me away from BJK is fees and performance. It charges 0.66% annually to manage the ETF. That wouldn’t be so bad if the performance were there. However, over the past five years, it has an annualized total return of 2.6%, 714 basis points less than the U.S. markets as a whole.
The thing this ETF has going for it is the potential growth of sports betting in the U.S. DraftKings (NASDAQ:DKNG) is the sixth-largest holding with a weighting of 6.13%. As its grip on digital betting, including sports, grows in prominence, investors can expect its weighting to increase.
iShares U.S. Energy ETF (IYE)
Ishares has 136 ETFs with $1 billion or more in total assets. Thus, the iShares U.S. Energy ETF, with slightly more than $500 million in total assets, isn’t in the same league. Not by a long shot.
IYE tracks the performance of the Dow Jones U.S. Oil & Gas Index, which invests in large-, mid- and small-cap stocks operating in the U.S. oil and gas industry. Integrated oil and gas companies such as Exxon Mobil (NYSE:XOM) account for 47.1% of the ETF’s portfolio. The second-largest industry allocation is oil and gas production at 21.2%, with downstream refiners and marketers accounting for 11.5% of the ETFs assets.
Its top 10 holdings account for 74.8% of the portfolio. Exxon Mobil and Chevron (NYSE:CVX), in turn, account for 60% of the top 10’s assets. Many investors who believe that fossil-fuel companies such as Exxon Mobil are destroying the earth would likely view the oil and gas giant as a vice stock possessing poor environmental, social and governance ratings.
That said, the iShares ESG MSCI USA ETF (NYSEARCA:ESGU), has 346 holdings and XOM stock is one of them with a weighting of 0.67%, making it the 30th-largest position in the $6.9 billion ETF.
So, sustainability is in the eye of the investor. A high ESG rating isn’t always based on an industry’s ability to deliver healthy products and services.
SPDR S&P Aerospace & Defense ETF (XAR)
As ETFs go, State Street’s ETF, which tracks the performance of the S&P Aerospace & Defense Select Industry Index, is a decent size with total net assets of $1.5 billion. Equal-weighted, the ETF provides investors with exposure to aerospace and defense companies across all market capitalizations, including small-cap stocks.
As a result, the 31 holdings have a weighted average market cap of $20.5 billion. By comparison, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has a weighted average market cap of $373 billion or more than 18 times XAR.
The top 10 holdings account for 40% of the fund’s total net assets. Because of Covid-19, the regularly scheduled quarterly rebalance of XAR was postponed from the March 20 close until after the June 19 close. Once rebalanced, they’ll all start at the same weighting, getting rebalanced again after the Sept. 18 close of trading.
One of the ETF’s holdings is General Dynamics (NYSE:GD), whose defense-related businesses include its Combat Systems and Mission Systems operating segments, which accounted for 32% of its overall revenue in the latest quarter and 39% of its operating profits.
Depending on how you look at it, General Dynamics’ defense products either save or take lives.
Performance-wise over the past five years, XARs annualized total return of 9.92% was 19 points greater than the entire U.S. markets as a whole over the same period.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.