Vice Investments: When and How?


Entertainment is one of the largest industries in the world. In a recent article, I estimated that drinking, drugs, sex (prostitution and pornography), restaurants, movies, and gambling were its largest categories, in that order. In my follow-up piece on dangerous addictions, I found that if cigarettes were included as a drug, drugs and drinking tied for first place.

There is an interesting literature on sin/vice investing (see F.J. Fabozzi, K.C. Ma, and B.J. Oliphant, “Sin Stock Returns”, Journal of Portfolio Management, Fall, 2008, and H. Hong and M. Kacperczyk, “The Price of Sin: The Effects of Social Norms on Markets”, Journal of Financial Economics, April, 2009).

In essence, the studies find that in the long run, sin stocks outperform the overall market. Why? Because some institutional investors shy away from sin stocks, sin industries have high entry barriers, and companies within sin sectors often have considerable pricing power.

But how about at different stages in the economic cycle: do some “sin sectors” do than others at different stages in the cycle? This question is addressed in the following paragraphs.


It is notable that a number of the leading entertainment sectors are considered addictive:

  • Drinking
  • Drugs
  • Sex, and
  • Gambling.

Before looking at data, I offer a few hypotheses:

  • The more serious the addiction, the less will sales fall in a global recession;
  • The greater the availability of substitutes for the addictive vice, the more seriously will the sector will be hit by downturns.
  • In an upturn, the opposite holds.

Consider the vices in light of these hypotheses.

Drinking – There are few substitutes for alcohol, but there are ways to reduce consumption costs: drink at home instead of in restaurants, and at least for wine and liquor, buy lower-priced brands. Consequently, alcohol revenues should fall somewhat in a global recession, with higher priced barns losing the most.

Drugs – Cigarettes are the dominant legal drug, a real killer with highly addictive nicotine being a primary ingredient. Virtually no substitutes. Consequently, cigarette sales should be quite recession-resistant.

Sex – Addictive, but for people living together, a zero-cost activity. In a recession, there should be a switch from prostitution to cheaper Internet pornography.

Gambling – In an article written last year on the gambling industry, I said: “…gambling is increasingly being promoted as an overall entertainment experience. In fact, a recent study has documented that more than 60% of casino revenues are generated by non-gambling activities. This makes a gambling outlay far more like a discretionary consumption item than a necessary addiction purchase. In addition, Internet gambling constitutes an inexpensive substitute to the casino experience. Consequently, I would expect that the gambling industry overall should be highly responsive to the overall economic cycle with major downturns in recession and major upturns in recovery.


What evidence is there on these hypotheses? Hong and Kacperczyk estimated betas (the percent increase in market values of each category relative to the overall market) for beer, smoking, and gaming for the 1926 – 2006 period. They found that beer stock prices moved up and down with the market overall (beta = 0.94), smoking was far less responsive to market changes (beta = 0.63), and gaming had bigger swings than the overall market (beta = 1.12). In short, these findings are consistent with the hypotheses outlined above.

But what do we find using current data that includes the 2008 – 2009 global recession? To examine this, I looked at 4 sin categories – drinking, smoking, gambling (casinos), and military (considered more of a sin industry in Europe than in the US). I took the average of quarterly stock price changes for three leading companies in each sector for the 2003 to April 2010 period.[1] The betas were generated by regressing these changes on changes in the S&P 500 index.

Sector Beta
Tobacco 0.50
Defense 0.66
Alcohol 0.70
Casino Gambling 1.58

On the face of it, the results are not surprising: on average, changes in tobacco equity prices are only half as great as changes in the S&P 500. Defense and alcohol could also be viewed as defensive since their betas are also low. But note the much higher beta for casino gambling.

Investment Implications

  • Vice as an industry is not homogeneous when it comes to the economic cycle.
  • Tobacco, Alcohol, and Defense do not fluctuate as much as the S&P 500, suggesting they would be good defensive investments in a stock market downturn.
  • Gambling casinos are just the opposite: in a market upturn, they should grow in value more than the overall market.

These findings suggest that coming out of a global recession, vice investments should be over weighted in gambling. Remember that gambling is now a part of the overall entertainment industry that includes hotels, restaurants and prostitution. And as most of the world emerges from a recession, discretionary consumption outlays should increase more rapidly than other outlays.

Investment Vehicles

You could buy one or more of the publicly listed casino companies. Alternatively, you might consider a mutual fund or an ETF. So far, the history of ETFs and mutual funds as money making entities for their owner/managers has not been good. FOCUSSHARES SINDEX (PUF) was launched in December 2007 and liquidated in October 2008. 

For today, consider two possibilities:

  1. For a mutual fund, consider The Vice Fund (VICEX). In addition to drinking, smoking, and gambling, VICEX includes defense as a sin/vice category (a view more prevalent outside the US). According its latest SEC report (3/31/2010), it manages $80 million and its holdings’ were:
  • Cigarettes – 39%
  • Defense – 23%
  • Alcohol – 21%, and
  • Gambling – 7%.
  • Cash – 10%.

2. Market Vectors ETF (BJK) is a global gaming ETF that corresponds to the price and yield performance of the S-Network Global Gaming Index. Launched on January 24, 2008, it now manages $120 million.

A quantitative comparison of BJK and VICEX is presented in the following table. The first date (1/25/2008) corresponds to the startup date of BJK. As would expect, the price fluctuations of BJK exceed those of VICEX. Gambling casinos fell more in the recession than the other sin categories. They have not recovered yet, but if my betas can be believed, they will rebound shortly.

Vehicle 1/25/2008 Low 5/17/2010
BJK 45.00 12.82 24.90
   % Change -71.51% -44.67%
VICEX 20.92 10.80 15.02
   % Change -48.37% -28.20%
S&P 500 1330.61 721.36 1133.85
   % Change -45.79% -14.79%

But for those who tout sin stocks as a defensive vehicle, note the performance of VICEX: it fell 48% in the recession, more than the S&P 500 (-46%). Maybe this is an illustration that in sin investing, the portfolio should reflect where you are in the economic cycle.

Looking Ahead

Suppose someone was foolish enough to give me a significant sum of money to invest in sin stocks (not likely). What would I do?

  1. I do believe the research findings: sin stocks outperform the market in the long run.
  2. Which sin categories to invest in depends on where you are in the business cycle.
  3. Eurozone countries notwithstanding, the world is emerging from the deepest and longest recession since the 1929 event.
  4. In these circumstances, sin investments should primarily be in gambling casinos.
  5. Let me add to these conclusions my oft-stated view to bet against the dollar and overweight in Asia and Latin American stocks. In light of the European mess, I also suggest betting against the Euro.
  6. The bottom line – I would invest in gambling casinos with large exposures in Asia and Latin America.
  7. I would also buy some wine futures.

I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset.

[1] For each sector, the largest three companies measured by total revenues in 2009 were chosen. Companies that had been significantly affected by mergers or acquisitions were omitted. Companies included for each sector were: Alcohol – ABV, DEO, STZ; Casinos – IGT, MGM, WYNN; Defense – BA, LMT, UTX; Tobacco – BTI, RAI, VGR.

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