The Vice Fund: Why Does Depravity Pay So Well?

A vice fund allocates investments strictly toward companies operating in the areas of tobacco, firearms, gaming, liquor or weaponry. In general, these areas are considered areas of "vice," meaning they are not thought of as "socially responsible" companies. While many people are opposed to investing in these industries, the fact remains that vice funds have outperformed other stock indices, including the S&P 500, in the past. 

Why Do Vice Funds Succeed?

The reason for these high returns cannot be attributed to a single factor. Some of the factors adding to the success of these funds, though, include limited access to the market and high mark ups on products. While there is no shortage of companies specializing in vice industry goods, there are far less companies in this marketplace than in other marketplaces. With gaming especially, there is limited access to the marketplace due to legalities. The same applies to firearms, where state laws often create a lack of market in one area, allowing the market in another state to thrive. Since is limited market competition, the companies specializing in these areas can mark up their products and services.

Why Are Vice Funds Are Profitable in a Recession?

Alcohol and gambling have long been though of as "recession proof" industries. On the whole, individual market participants will continue to engage in these sectors of the market even while cutting back in others. Individual purchasers may stop buying new cars, homes or other luxury items, and they may even try to save money on groceries. When it comes to alcohol specifically, though, a recession seems to have no impact on the way a purchaser thinks about alcohol. In fact, the alcohol industry tends to thrive in recessions.

How Are Vice Investments Viewed on the Market?

Socially responsible investing has picked up steam in recent years. Many are encouraging investment in the green economy, the health industry or even medical research. Investing in vice funds is like committing a "vice" on the marketplace. Investment houses that offer vice funds appear to have "sold out" for an easy dollar. They are capitalizing on the fact humans continue to spend money on purchases that are not beneficial to society instead of trying to impact positive change. In the end, though, if vice funds continue to produce high returns, many investment houses may give in and offer the fund options. 

Where Do I Buy into a Vice Fund?

Ask your financial adviser about investing in areas of the vice market or in a vice fund. Some securities to consider are those offered by: tobacco giant Phillip Morris, defense giant Lockhead Martin or alcohol producer SABMiller. Your financial adviser can help you create an independent portfolio made up of vice shares if you would prefer to make the determination yourself. For example, some investors are comfortable investing in an alcohol company but not a firearms and weaponry company, or visa versa. You can exercise this option by selecting your own vice shares instead of investing in a vice fund where you may be in an "all or nothing" situation.

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