Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 346

Do sin stocks really give your portfolio the edge?

Two recent papers looked at the historically strong performance (and recent weak performance) of what are known as ‘sin’ stocks. The analysis found that the stocks’ past outperformance (or alpha) was not as simple as reaping the rewards of a ‘deal with the devil’.

What are sin stocks?

‘Sin’ stocks are usually considered to be those whose activities are dominated by what would be considered unethical or immoral activity, usually alcohol, tobacco, gambling, adult entertainment and weapons.

We looked at two relevant papers covering the returns of such stocks:

  • Blitz, D. and F.J. Fabozzi. Sin Stocks Revisited: Resolving the Sin Stock Anomaly, 2017
  • Jorgensen, A. 'Sin' Stock Exclusions: What is the Impact?, UBS Global Research, October 2019

The data in both papers is drawn from Kenneth French’s data library and covers tobacco, alcohol and weapons.

Note that this approach identifies only the manufacturers of these goods, and indeed only firms for which manufacturing the product is their primary business.

Performance of sin stocks in history

Chart 1 below (from the UBS paper) shows that these stocks had very strong performance from the early 2000s to about 2016 or 2017. In fact, the data show that over the past 43 years, a cap-weighted benchmark of the largest 50 ‘sin’ stocks has outperformed the MSCI World by nearly 5% per year.

Chart 1: Sin stocks performance v benchmark: outperform the benchmark significantly and then sell-off over the last three years

The chart also plots the excess return of a portfolio of the MSCI World without these 50 names, to see what performance drag the portfolio would have had from excluding them. The answer is – very little. In fact, the portfolio of MSCI World, excluding the 50 sin stocks, only underperforms the MSCI World itself by about 6bps (0.06%) per year, as per Table 1.

Table 1: Summary statistics of portfolios of sin stocks, MSCI World (ex-sin stocks) and the MSCI World itself

The reason for this is clear – these stocks only actually represent a small component of the investible universe (a global average of 2.2%). Blitz and Fabozzi (2017) state that the size of these stocks in Developed Markets portfolios is not large: “… the combined weight of the sin sectors averages 2.1% for the United States, 3.5% for Europe, 1.6% for Japan, and 2.2% for global.” The UBS paper also notes that “… the low market capitalisation of these sectors means that, in practical terms, excluding them does not lead to significant change in performance.”

Recently, the outperformance of sin stocks has reversed, with a portfolio of 50 sin stocks down about 6% per year for 2017–2019.

Chart 2 (again from UBS) shows the stocks’ outperformance by broader sector categorisations, over a much longer horizon than Chart 1. The sin stock groupings here are alcohol, tobacco and weapons, which are easier to capture over a long period. All three sectors have participated in this alpha, with tobacco the best. The 1960–1990 period is truly remarkable, with the aggregate sin portfolio creating approximately 16 times the wealth of investing in the broader stock market.

Chart 2: Sin stocks outperformance by sector

Recent performance of sin stocks

As noted, Chart 3 shows that many sin stocks have sold off very strongly over the past three years. It appears the main drivers have been increased regulations, the rise of ‘vaping’ as a smoking alternative, and investors choosing to divest or exclude the stocks for ethical reasons.

Chart 3: Annual outperformance for each sector 2016-2019

Was there ever any alpha?

At first glance, the above charts would suggest that having an aggressive holding in these sectors would have delivered outperformance (alpha). However, the two papers agree conclusively that while apparent in simple excess return calculations, this alpha does not survive analysis when considering common factors such as size, value or momentum.

That is, there is no specific alpha in these names. The alpha is captured by well-known return factors, and so their factor exposure (and performance) could potentially be replicated by a portfolio of other (‘non-sin’) stocks.

The return factors used to capture any alpha (or detect unique insights) stem from the Fama and French class of models. The Blitz and Fabozzi paper, and the UBS analysis, both use the market return itself plus six other return premium factors:

  • Size: smallest stocks over largest stocks, by market cap
  • Value: cheapest stocks over most expensive stocks (measured using Book to Price)
  • Momentum: highest 12-month momentum stocks over lowest 12-month momentum stocks
  • Low beta (or ‘betting against beta’): Low beta stocks over high beta stocks
  • Profitability: highest profit margin stocks over lowest profit margin stocks
  • Investment (or ‘over investment’): lowest asset growth stocks over highest asset growth stocks

No sin in excluding these stocks

The observed outperformance is subsumed by a set of well-known return factors. Among other things, sin stocks seem to be low beta, are smaller than average and don’t seem to have a systematic value or momentum tilt. Sin stocks can be excluded from a portfolio without compromising potential performance.

 

David Walsh is Head of Investments at Realindex Investments, a wholly owned investment management subsidiary of First Sentier Investors, a sponsor of Firstlinks. This article is primarily for information. It discusses ideas that are important to the Realindex investment process and clients but may not be implemented in the ways discussed here.

For more articles and papers from First Sentier Investors, please click here.

 

  •   26 February 2020
  • 3
  •      
  •   
banner

Most viewed in recent weeks

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

2 billion reasons to fix retirement income

A proposal to address Australia's 'stranded balances' in retirement by requiring super funds to transition members to pension phase at 65, boosting retirement income and reframing super as a source of income.

Latest Updates

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Retirement

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Superannuation

Markets have always delivered for super fund members. What if they don’t?

What happens if market resilience in the face of ongoing geopolitical tensions ends? Potential decade-long market weakness shows the need for contingency planning.

Retirement

We tend to spend less in retirement …

Studies show that a drop in expenditure during retirement leads to a happier retirement. But when costs ramp up again later in life, it's a guaranteed income that makes spending more hurt less.

Shares

Can you value a share just using dividends?

A cow for her milk, a stock for her dividends. Investors are too quick to dismiss this valuation technique. 

Property

The 25-year property trust default is being questioned

The 33% CGT discount rate being floated isn’t random. It sits at the structural break-even between trust and company for the multi-property cohort. That’s driving the conversation we’re hearing now.

Investment strategies

Are active managers bringing a knife to a gunfight?

How passive investing has permanently changed market structure — and why sophisticated tools are now the price of survival.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.