With BAD and VICE ETFs, the Devil Is in the Details

While focusing, tilting, and straight-out greenwashing approaches to environmental, social and corporate governance investing have been all the rage recently, the newly launched BAD Investments Co entered the exchange-traded fund marketplace with the launch of the B.A.D. ETF . The fund is positioned as a vehicle focused on so-called vice industries and it got me thinking about two other ETFs, the AdvisorShares Vice ETF and the long since closed FocusShares ISE Sindex Fund (PUF), whose index is still live, despite the fund's closure in 2008. You've Been Very BAD B.A.D. was launched just before Christmas and is focused on betting, alcohol and drugs. The fund has an expense ratio of 75-basis points, meaning that if you invested $1,000 in the fund over a year, you would be paying $7.50 in fees. The fund tracks the EQM BAD Index and reading through the methodology I was surprised to see that the drugs segment isn't targeted toward cannabis or psychedelics, but rather, traditional pharma and biotech. Cannabis is lumped in with alcohol, and, from what I can tell, psychedelics aren't contemplated as a word search didn't find the term in the index methodology. As the white paper has yet to be published (not faulting anyone as these things take time, trust me, I know) I'm not sure of the rationale for tying traditional pharma into a vice-focused strategy, but am interested to find out. While it was surprising to see cannabis lumped in with alcohol, the number of cannabis ETFs nearly matches the many varieties of cannabis, so I understand the issuer's reluctance to launch a dedicated fund in an already crowded space. In terms of weighting, each segment is equal weighted (33% in each of B, A and D) and cannabis exposure in A is limited to 10%. From a selection criteria perspective, the fund doesn't set a hard target for revenue exposure, but simply states that companies must derive the majority of their operating revenue from the various segments. Betting and alcohol/cannabis companies must have a minimum $1 billion market capitalization for initial inclusion and a buffer rule reduces this threshold to $500 million for existing constituents. Drug sector companies must have a minimum $10 billion market capitalization with a buffer rule limit of $5 billion for existing constituents. Within drugs, biotechnology company selection is limited to the top 10 names by market capitalization. With such a focus on larger cap names, the fund should sidestep any position liquidity issues but might end up missing out on some of the growth associated with small- and mid-cap companies. An Investing VICE The 159-basis point (99 after a 60 BPS fee waiver) AdvisorShares Vice was launched in 2017 and right off the bat seems to have a more targeted focus on more traditional vices. This is similar to the index I'll talk about next, which is truly SIN-ful. The fund is actively managed, so there is no index to track. Reading through the summary prospectus, I see portfolio manager Dan Ahrens sets a 50% revenue exposure threshold for names in the portfolio. The fund focuses on tobacco and alcohol, gaming (including eSports), food and beverage and companies, that in the opinion of the advisor, engage in other vice-related businesses. That catch-all category explains how firearms manufactures Smith & Wesson Brands and Sturm Ruger & Co end up in the portfolio. While there is no stated weighting methodology, the prospectus outlines that the fund concentrates at least 25% of its investments in food, beverage and tobacco names. The fund also doesn't shy away from small and mid-cap names. Cannabis is well represented in the rest of AdvisorShares fund lineup, so has been left out of the scope of this fund. I am puzzled as to how video game companies like developer Take-Two Interactive Software and headphone manufacturer Turtle Beach Corp fit into the vice narrative. Also, while there are studies that link certain foods and food habits to what could be called addictive behavior it's not the first thing that comes to mind when I think about vice. One Hell of an Idea: SINDEX Way back in the day, I was responsible for maintaining the ISE SINDEX Index (SIN). I mention this index for two reasons. The first is that if it weren't for the mortgage crisis in 2008, FocusShares might still be around issuing ETFs. The second is that the premise for SINDEX is simple: Track companies whose products or services, or both, are literally addictive. This includes alcohol, tobacco and gambling. Like many good investment strategies, this approach is straightforward, doesn't get tangled up in the thought exercise of trying to match shifting social mores and is truly defensive. Predatory? Maybe, depending on your point of view. I'm surprised that no other ETF issuer has looked to license this index, as it is the O.G. of vice investing with over 13 years of live history, truly reflects vice, and has a very simple story to tell. This is an example of what I would consider a vice strategy. Perhaps I'm a little on the old-school side with my approach, but it just makes sense to me. As you can tell by my comments, I have nits to pick with both BAD and VICE. Still, while I may not fully understand the rationale for some of the segments or security selection, VICE does seem to capture more of the spirit of the strategy than BAD.

With BAD and VICE ETFs, the Devil Is in the Details

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