There are many ways into alcohol investing, but among the most promising methods out there are Exchange Traded Funds (ETF).
Whisky is generating a great deal of attention right now, as investors take notice of its potential. Perhaps the most stand-out figure was from the 2020 Knight Frank’s Wealth Report, which showed an incredible 564% growth in the value of rare whisky over the last ten years.
On top of that, the Rare Whisky Apex 1000, a benchmark index for rare whisky, jumped an impressive 6.7% in 2020. Demand for collectible Japanese whisky climbed higher still, with the RW Japanese 100 up 18.7% for the year.
Today, such healthy returns have left many investors looking for ways to enjoy a slice of the action themselves and many are now asking should I invest in alcohol ETFs?
Fundamentals of alcohol ETFs
Alcohol ETFs are bought and sold on a stock exchange. They hold a range of assets like stocks and bonds, or sometimes commodities like gold bars.
The products are typically less expensive than other types of funds. This is because they can they simply track and replicate the performance of a range of assets. That could be a particular index like the FTSE 100 or the S&P 500or a particular theme like technology or sustainable energy.
ETFs are also perhaps the easiest products to access, too. This is because they don’t have the often very large minimum investment requirements that other funds do.
ETFs can be traded all day just like any other stock. Mutual funds, by contrast, can only be traded once per day after markets close. This makes it easier to buy, sell, and take precautions such as stop-loss limits.
There are a huge variety of ETFs out there that cater to the requirements of different kinds of savvy investors.
An excellent place for would-be investors to begin might be through the so-called ‘vice ETFs’ out there that offer exposure to sectors like alcohol, tobacco, gambling, and marijuana. This is similar to the concept of a ‘sin stock’, the name given to stocks associated with these supposedly immoral activities.
The AdvisorShares Vice ETF (NYSEARCA: VICE) is one example. This ETF invests in various vice industries, like gambling and tobacco, with a 22% sector allocation for alcohol. Year-to-date, shares in this vice ETF have jumped 20%. Meanwhile, they are up 23% on a five-year basis.
Holdings in the AdvisorShares Vice ETF include Diageo(LON: DGE), which owns the Johnnie Walker whisky brand, and Jack Daniel’s whiskey owner Brown-Forman (NYSE: BF.B | NYSE:BF.A).
What is the bull case for alcohol ETFs?
Historically, vice industries such as alcohol, tobacco and gambling tend to be recession resistant and can actually experience a boom during times of economic uncertainty. As seen by the rapid recovery in Diageo’s shares of late, which are already trading above pre-pandemic levels.
This makes them an attractive investment option for investors as they generally provide consistent growth and performance. Alcohol-related companies are well known to have some of the highest profit margins within the consumer product sector, making them a worthwhile investment for those looking to diversify their portfolios.
Of late whisky in particular is proving to be a popular choice among investors. Whisky investing is taking on a life of its own and very much up there with other favoured alternative investments such as art, rare coins and fine wine.
Undeniably as we recover from the economic impact of the global pandemic, investing in alcohol ETFs seems like a valid and viable option for investors.
What is the bear case for alcohol ETFs?
Although investing in alcohol ETFs may seem like a sure thing, it is important to remember that every investment comes with an element of risk. It is also worth mentioning that the alcohol sector is one of the most competitive.
Another factor to consider with vice stocks such as alcohol ETFs is that they face higher regulatory and taxation risks than the average company, which could cause problems further down the line. For example, the changes to the selling of tobacco and the rules around advertising, many are calling for alcohol to follow suit in the future, which could make a big impact on the market.
For some investors, investing in vice or sin stocks is considered unethical and since there are so many ethical questions around these industries, it is important to remember that shifts of national and political opinion or trend can dramatically impact these markets.
Should I invest in alcohol ETFs?
Each of the avenues to alcohol investing have their own strengths and could appeal to all kinds of investors. When considering the variety of funds on offer, investors should think about whether they want to invest in alcohol specifically or are looking for greater diversity.
The barrier for ETFs is lower. They also offer exposure to other vices, but they might not have enough of a dedicated alcohol focus for some. Especially for someone looking to get into whisky specifically
Meanwhile, for the whisky-minded investor, the Single Malt Fund and VFund might offer more of a golden opportunity.