Is it better to be bad than to be good? It is a question that has plagued humanity since the beginning of time, and the world of investing is not immune to the controversy. In one corner are fans of socially responsible investing (SRI), and in the other corner are fans of sin stocks.
Key Takeaways
- Over the past decade, socially responsible investing (SRI) has become an important investment trend, with people choosing only those stocks that support their communities, the environment, and good corporate governance.
- SRI stocks can be contrasted with sin stocks—companies that engage in activities that can be harmful, such as tobacco, alcohol, and firearms, as well as large polluters.
- While SRI may fit your moral convictions, economists warn that investing solely in SRI stocks leaves important gaps in a diversified portfolio that can limit returns and concentrate risk.
The Case for Socially Responsible Investing (SRI) and for Sin Stocks
SRI fans prefer an investment strategy that views successful investment returns and responsible corporate behavior as going hand in hand. They believe that by combining certain social criteria with rigorous investment standards, they can identify securities that will earn competitive returns and help build a better world.
Proponents of sin stocks have traditionally favored companies in the gambling, alcohol, tobacco, and firearms industries. Any companies that make a profit have a place in their portfolios, regardless of whether the firm builds nuclear power plants, sells components for land mines, or has questionable labor practices. This camp points out that somebody is going to profit from these industries and argues that there’s no reason to miss out on the opportunity.
Buy into Sin, or Put Your Money Behind Your Convictions?
SRI fans argue that it’s possible to do some good while making money. Their argument rests on the idea that socially responsible companies are likely to be well-managed because their underpinnings are based on solid values.
Sin stock fans argue that SRI mandates pass up good opportunities in companies that have strong fundamentals, trading profits for a feel-good factor. The sin stock crowd feels good when their investments deliver solid returns. They would rather put money in the bank by backing industries that meet consumer demand than starve for their convictions.
Modern portfolio theory (MPT) seems to back the argument of sin stock proponents, as constructing the optimal portfolio should be more challenging if some stocks are removed from the universe of possible investments.
A Look at the Numbers
The Impax Sustainable Allocation Fund, launched on Aug. 10, 1971, as the Pax Balanced Fund and renamed on Dec. 31, 2022, is the oldest operating SRI fund in the business. The Vice Fund, launched on Aug. 30, 2002, is considered one of the industry’s oldest sin funds. A look at the two funds’annualized returns (as of early 2022) tells an interesting story. For 10 years running, the socially responsible fund has done better.
| Fund Name | 1-Year | 3-Year | 5-Year | 10-Year | Since Inception |
|---|---|---|---|---|---|
| Impax Sustainable | -13.38% | 7.09% | 6.97% | 7.68% | 8.24% |
| Vice Fund | -13.74% | -0.07% | 0.74% | 6.79% | 7.82% |
**Impax Sustainable Fund as of Aug. 31, 2022 (then the Pax Sustainable Allocation Fund); Vice Fund as of June 30, 2022
Comparing the funds to their respective indexes provides another perspective. Impax delivered index-like performance across the board, while Vicefell short ofits benchmarkin every metric.
| Fund Name | 1-Year | 3-Year | 5-Year | 10-Year | Since Inception |
|---|---|---|---|---|---|
| Impax Sustainable | -13.38% | 7.09% | 6.97% | 7.68% | 8.24% |
| T. Rowe Price Balanced | -14.04% | 4.51% | 5.74% | 7.65% | unavailable |
| Fund Name | 1-Year | 3-Year | 5-Year | 10-Year | Since Inception |
|---|---|---|---|---|---|
| Vice Fund | -13.74% | -0.07% | 0.74% | 6.79% | 7.82% |
| Pioneer Global Sustainable Equity Class Y | -8.67% | 13.39% | 8.14% | 10.34% | 6.85% |
Complications
Interestingly, SRI funds tend to invest heavily in technology, healthcare, and financial services. It is also important to consider the cyclical nature of the markets. When sectors, such as technology and healthcare, are topping the charts, sin stocks may be out of favor or at least underperforming the market leaders. Similarly, when stocks that SRI funds won’t buy are leading the pack, sin stocks will outperform.
It is also worth noting that the universe of SRI funds vastly outnumbers the universe of sin funds. There are dozens ofSRI funds, including big names, such as Dow Jones andCalvert, and a number of exchange-traded funds (ETFs).
On the sin stock side, there are fewer than a half-dozen offerings, even with ETFs included, although there are plenty of individual securities that fit the mold, so constructing a portfolio based on stocks that SRI funds won’t hold is easy to do.
Which Funds Are More Prevalent, SRI or Sin?
The world of SRI funds is much larger than that of sin funds. There are fewer than a half-dozen sin offerings, including ETFs, but dozens of SRI funds, such as those of Dow Jones and Calvert, and many ETFs.
What Is Modern Portfolio Theory (MPT)?
MPT is a practical method for selecting investments to maximize their overall returns within an acceptable level of risk through diversification. Most investments are either high risk and high return or low risk and low return.Harry Markowitz, who pioneered the theory, arguedthat investors could achieve their best results by choosing an optimal mix of the two based on an assessment of their individual tolerance to risk.
Do SRI Funds Hold Some Sin Funds’ Former Favorites, Such as Gaming and Alcohol Stocks?
Yes, some do. Gaming and alcohol companies are viewed more favorably now than they once were, and some investors contend that there are more pressing social ills and corporate governance issues that are worse for society than those two.
The Bottom Line
Where should you put your money? If your moral convictions won’t permit investments in sin stocks, then your choice has already been made. Just be sure to learn about the screening criteria for the funds that you are considering, or you could end up with companies that don’t represent your values in your portfolio.
If you’re just looking to make a solid investment, moral convictions aside, then a diversified portfolio including both saints and sinners may be the better choice.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Impax Asset Management. “Impax Asset Management Renames Pax World Funds to Impax Funds.”
USA Mutuals. “Vice Fund (VICEX) Factsheet.”
Impax Asset Management. “Impax Sustainable Allocation Fund.”
Fidelity. “PGSYX: Pioneer Global Sustainable Equity Fund Class Y: Performance and Risk.”
T. Rowe Price. “Balanced Fund (RPBAX).”
UBS, Nobel Perspectives. “Harry Markowitz.”
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Part Of
Guide to Socially Responsible Investing
- Guide to Socially Responsible Investments (SRI)1 of 22
- Why Social Responsibility Matters to Businesses2 of 22
- Investing in Unethical Stocks: Pros and Cons for Traders3 of 22
- Socially Responsible Investing (SRI) vs. Sin Stocks4 of 22
- Racial Justice Investing: What It is, How It Works5 of 22
- The Top 5 Impact Investing Firms6 of 22
- Socially Responsible Mutual Funds7 of 22
- The Rise of the Socially Responsible ETFs8 of 22
- Demand for ESG Investments Soars Emerging From COVID-19 Pandemic9 of 22
- A Guide to Faith-Based Investing10 of 22
- Socially Responsible Investment for Gender Empowerment11 of 22
- A History of Impact Investing12 of 22
- Impact Investing vs. Venture Philanthropy13 of 22
- How Do ESG, SRI, and Impact Funds Differ?14 of 22
- Ethical Investing: Overview and How To Do It15 of 22
- Social Responsibility in Business: Meaning, Types, Examples, and Criticism16 of 22
- What Is CSR? Corporate Social Responsibility Explained17 of 22
- What Is ESG Investing?18 of 22
- Conscious Capitalism: Definition, 4 Principles, and Company Examples19 of 22
- Social Impact Statement: Meaning, Criticisms, Example20 of 22
- Social Impact Bond (SIB): Definition, How It Works, and Example21 of 22
- Impact Investing: Definition, Types, and Examples22 of 22
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Sin Stock: What it is, How it Works, Pros and Cons
A sin stock is a publicly traded company involved in or associated with an activity that is considered unethical or immoral.
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