Sin Stocks Explained

Some industries are so socially unacceptable that the stocks of companies in these sectors are referred to as sin stocks. This moneyland.ch guide answers the most important questions about this category of stocks.

What are sin stocks?

Sin stocks is a broad term that is used in reference to the stocks of companies which operate in markets that are considered unethical or morally reprehensible by large portions of a society. Sin stocks are often considered to be the opposite of ESG stocks. Companies in the following industry sectors are often considered sin stocks:

• Alcohol
• Cannabis
• Fossil fuels
• Gambling
• Pornography and other adult entertainment
• Raw materials (commodities)
• Tobacco
• Weapons and defense

What is morally unacceptable at any given time changes along with the social zeitgeist. That means the list of sin stocks is always changing. It is perfectly plausible that airlines, cruise ship operators, and companies in the meat production and processing business could one day be considered sin stocks because of environmental concerns. In addition to demographic differences, there are huge geographical differences with regard to which companies are considered sin stocks. Corporations that have a loathsome reputation in Switzerland could, in other parts of the world, be perceived as completely normal, or even as exemplary companies.

Why do some investors find sin stocks interesting?

The companies behind sin stocks often have crisis-resistant business models that also work in times of economic or political uncertainty. The tobacco industry is a good example: smokers generally continue to buy cigarettes even in times of crisis. The defense industry too will likely continue to enjoy full order books in the foreseeable future.  

What are the risks of investing in sin stocks?

The term sin stock is generally limited to companies in a small number of industry sectors. Focusing too strongly on “sinful” companies can result in poor diversification. That is especially true if you only invest in a small selection of individual stocks.

But perhaps more importantly, sin stocks are exposed to higher political risks than other stocks. For example, if the governments were to pass strict legal measures against the consumption of tobacco, that could have far-reaching consequences for tobacco companies. If an industry sector is viewed as socially unacceptable or harmful, it is more likely to become the subject of restrictions and prohibitions than other industries.

In every case, investing in the stock market is always connected with risk. Returns are never guaranteed, and losses can never be ruled out.

How well do sin stocks perform?

It is not easy to determine how sin stocks perform in relation to the stock market as a whole. That is because there are no standardized criteria for deciding which stocks fall into this category. That is also true of other values-based investment categories like ESG, sustainable investments, and gender lens investing.

While there are no clear answers, a look at certain global indices published by US financial services provider MSCI offers some clues about how sin stocks can behave in relation to the global stock market.

• The MSCI World Index encompasses around 1500 companies from 23 countries, across many different industry sectors.
• The MSCI World ex Tobacco ex Controversial Weapons Index is based on the MSCI World Index, but excludes companies, and manufacturers of controversial weapons like cluster munitions and landmines.
• The MSCI ACWI Tobacco Index tracks nine tobacco companies that operate internationally.

Table: Comparison of index performance by year

Performance in US dollars as per fund factsheets. End date for 5-year and 10-year performance: 31.01.2024.

The historical data in the table above shows that the MSCI ACWI Tobacco Index delivered positive returns in 2015 and 2022 – two years in which the global stock index had negative performance. That lends credibility to the theory that sin stocks like tobacco are not as susceptible to crises as other stocks.

But the data also shows that the MSCI ACWI Tobacco Index also performed much worse than the global stock market as a whole in many years (2016, 2017, 2018, 2020, and 2023). The total performance for the past five and ten years is also far lower than that of the MSCI World and the MSCI World ex Tobacco ex Controversial Weapons Index. The latter delivered the best overall performance of all three indices.

However, it is important to note that tobacco companies make up just a small part of the sin stock category. The data in the table above does not indicate the performance and the potential returns of sin stocks as a whole.

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