There is no dedicated exchange traded fund for so-called sin stocks or makers alcohol, tobacco, firearms and casino operators. Military hardware makers can also be classified as sin stocks.
However, there are plenty of ETFs with which investors can build a sinful portfolio. Assuming some or all of the ETFs to be highlighted here were chosen, that less-than-innocent portfolio would have generated impressive returns in 2013, but some of the ETFs on the roster now sport lofty valuations.
“Thanks to the recent hot streak, most sin stocks are trading a bit above their 10-year average price/earnings ratios,” reports Susie Poppick for Money. The article goes on to note that not all vice stocks are richly valued, but investors would be wise to be choosy.
Few alcohol stocks are significant holdings in ETFs, but Anheuser-Busch InBev (NYSE: BUD) is 21.6% of the iShares MSCI Belgium Capped ETF (NYSEArca: EWK). From an investing standpoint, beer is not the compelling growth story that vodka or whiskey are, but Anheuser-Busch is expected to get a boost from the 2014 World Cup and the stock has helped EWK gain 14.4% this year.
EWK sports a P/E ratio just under 20, making it cheaper than the comparable Germany, Netherlands and Switzerland ETFs. [Belgium ETF: Cheap Beer]
Tobacco companies are not too pricey. “Their P/E ratios are 15% below those of other companies that make products that consumers use daily (like food), and 5% below the market,” Money reports, citing Stifel. However, accessing stocks like Altria (NYSE: MO) and Philip Morris (NYSE: MO) with ETFs does mean tacking a step up the valuation ladder.
Tobacco exposure via an ETF can be easily obtained with a fund such as the Consumer Staples Select Sector SPDR (NYSEArca: XLP), the largest staples ETF. Philip Morris and Altria combine for nearly 13% of XLP’s weight and both are top-10 holdings of the fund. Staples are not cheap, though. Not only are staples the second-priciest S&P 500 sector behind discretionary at the moment, but staples are also trading above their five- and 10-year averages. [Financials are the Rodney Dangerfield Sector]
Gambling is the sinful sub-sector where high valuations are readily apparent. The Market Vectors-Gaming ETF (NYSEArca: BJK) “trades at nearly 20 times forward earnings. Wynn (NasdaqGM: WYNN), a top player in Vegas and Macau, sports an even higher P/E ratio of 24,” according to Money.
BJK may sound expensive, but the ETF’s 42.2% gain this year justifies the valuation. Further justifying the premium at which BJK trades is its 14.6% weight to China, which when it comes to gambling, means Macau. Macau is the world’s largest gambling hub and its growth trajectory is up, not flat or down.
Market Vectors-Gaming ETF