By |Published On: July 29th, 2021|Categories: ESG, Research Insights, Larry Swedroe|

While environmental, social, and governance (ESG) investing continues to gain in popularity, economic theory suggests the share prices of “sin” businesses (typically those involved in the gambling, tobacco, alcohol, guns, and defense industries) will become depressed if a large enough proportion of investors choose to avoid them—the “shunned-stock hypothesis.” Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio—providing investors with higher expected returns. Some investors may view those higher expected returns as compensation for the emotional cost of exposure to offensive companies. On the other hand, socially conscious investors may be willing to accept less-than-optimal returns while gaining peace of mind knowing they are not promoting activities they believe are detrimental to society and/or one’s health.(1)

The evidence from research papers such as 2009’s “The Price of Sin: The Effects of Social Norms on Markets,” the 2017 papers “Fewer Reasons to Sin: A Five-Factor Investigation of Vice Stocks” and “Sin Stocks Revisited: Resolving the Sin Stock Anomaly,” and the 2020 study “The Underpricing of Sin Stocks” has found:

  • Sin stocks have provided abnormal risk-adjusted returns due to neglect by institutional and retail investors, who lean toward the side of ESG.
  • The abnormal return to sin stocks occurred because they are more profitable and less wasteful with investment than the average corporation.
  • Sin stocks tend to be low-beta stocks and have highly statistically significant loadings on the betting-against-beta (BAB) factor.
  • Sin firm IPOs are more underpriced (22.3%) than non-sin firm IPOs.

Greg Richey contributes to the literature on sin investing with his study “Is It Good to Sin When Times Are Bad? An Investigation of the Defensive Nature of Sin Stocks,” published in the October 2020 issue of The Journal of Investing. Richey analyzed the defensive nature of individual sin industries against the market portfolio. His database covered the period 1980 to 2019 (providing 480 monthly observations) and 106 firms from four sin-related industries—alcohol, tobacco, gambling, and defense. He constructed a sin fund portfolio as well as one portfolio for each industry (a booze fund, a smoke fund, a game fund, and a boom fund).

Following is a summary of his findings:

  • Sin stocks have had higher returns and Sharpe ratios than the market portfolio, and sin industry funds’ returns have been less correlated with each other than they have been with the market portfolio.
  • The betas of the sin portfolios were less than one, indicating they have less systematic risk than the market portfolio (they are more defensive).
  • Bad news events have a lesser impact on sin stock return volatility than do good news events.

As the following table demonstrates, the returns on the sin portfolios outperformed the market portfolio (S&P 500) over the sample period, both in percentage (mean) return and in risk-adjusted (Sharpe) return. They also outperformed the BAB factor portfolio.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.


As the shunned-stock hypothesis suggests, sin stocks have not only provided higher returns than the market portfolio but higher risk-adjusted returns as well. In addition, Richey’s study demonstrates that sin stocks provide the added benefit of being defensive in nature, reducing the tail risk of investing in equities. Risk-averse investors may conclude that, for them, sin investing is a good choice.

Important Disclosure:  The information provided in this article is for educational purposes only and should not be construed as specific investment, accounting, legal or tax advice.  The analysis herein may be based upon third party information and may become outdated or otherwise superseded without notice.  Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.  By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Wealth Partners, collectively Buckingham Strategic Wealth® and Buckingham Strategic Partners®.  R-20-1511


About the Author: Larry Swedroe

Larry Swedroe
As Chief Research Officer for Buckingham Strategic Wealth and Buckingham Strategic Partners, Larry Swedroe spends his time, talent and energy educating investors on the benefits of evidence-based investing with enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books: “What Wall Street Doesn’t Want You to Know” (2001), “Rational Investing in Irrational Times” (2002), “The Successful Investor Today” (2003), “Wise Investing Made Simple” (2007), “Wise Investing Made Simpler” (2010), “The Quest for Alpha” (2011) and “Think, Act, and Invest Like Warren Buffett” (2012). He has also co-authored eight books about investing. His latest work, “Your Complete Guide to a Successful and Secure Retirement was co-authored with Kevin Grogan and published in January 2019. In his role as chief research officer and as a member of Buckingham’s Investment Policy Committee, Larry, who joined the firm in 1996, regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the organization’s formal investment strategy recommendations. He has had his own articles published in the Journal of Accountancy, Journal of Investing, AAII Journal, Personal Financial Planning Monthly, Journal of Indexing, and The Journal of Portfolio Management. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television shows airing on NBC, CNBC, CNN, and Bloomberg Personal Finance. Larry is a prolific writer and contributes regularly to multiple outlets, including Advisor Perspective, Evidence Based Investing, and Alpha Architect. Before joining Buckingham Wealth Partners, Larry was vice chairman of Prudential Home Mortgage. He has held positions at Citicorp as senior vice president and regional treasurer, responsible for treasury, foreign exchange and investment banking activities, including risk management strategies. Larry holds an MBA in finance and investment from New York University and a bachelor’s degree in finance from Baruch College in New York.