Are Alcohol ETFs a Good Way to Invest?

Whisky, gin, and other spirits have been generating a great deal of attention in recent years as investors take notice of alcohol's investment 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 previous 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.

In 2022, in collaboration with Brainnwave, Scottish investment bank Noble & Co analyzed over 5.2 million data points from whisky transactions, unveiling the first Noble & Co Whisky Intelligence report for 2022. This report tracks about 45% of the market for fine and rare single malt Scotch whisky, showing a 23% increase in the volume of rare whisky bottles sold over a nine-month period, driven mainly by bottles priced between £100 and £1,000. It forecast sales of 56,000 bottles worth £42 million in 2022 for this segment.

After years of robust growth, the fine and rare whisky auction market presented a more varied outlook in 2023. The market saw a 7% decline in the value of whiskies sold for over £1,000 per bottle despite a 10% rise in volumes sold, reflecting increased market uncertainty. This change is attributed partly to a shift toward lower-priced bottles amid a challenging macroeconomic climate marked by high inflation.

Despite these trends, ultra-rare whiskies like The Macallan 1926 continue to fetch record prices, suggesting exceptions in a generally softening market. With economic conditions expected to remain weak, price sensitivity is likely to persist into 2024. The Macallan remains the most traded distillery in the secondary market, while brands like Tamdhu, The Dalmore, and The Glenturret are emerging as fast-growing.

Today, such healthy returns have left many investors looking for ways to enjoy a slice of the action themselves.

What are Alcohol ETFs?

Alcohol ETFs are bought and sold on a stock exchange. Exchange Traded Funds hold a range of assets like stocks and bonds, or sometimes commodities like gold bars.

ETF products are typically less expensive than other types of funds. This is because they can 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 500—or 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 is a huge variety of ETFs out there that cater to the requirements of different kinds of savvy investors.

Critically, that includes whisky enthusiasts via an alcoholic beverage ETF.

Investing in Alcohol

An excellent place for would-be whisky 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.

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).

Regardless of whether you spell it whisky or whiskey, the makers of these spirits both have a worldwide distribution, extremely well-known brands, and strong dividend histories. That’s why these beverage companies are often found in liquor ETFs.

These popular stocks have also proven resilience to recessions, as seen by the rapid trajectory of Diageo’s shares, which rapidly recovered after the COVID-19 pandemic.

As a managed fund, the AdvisorShares Vice ETF has a 0.60% management fee. This is much lower than the several percentage points that more traditional equity funds can sometimes hit.

Another vice-linked alcohol stocks ETF is the Invesco Dynamic Food & Beverage ETF (NYSEARCA: PBJ). Its top holdings include Brown-Forman as well as Corona beer owner Constellation Brands (NYSE: STZ) (NYSE: STZ.B). This ETF is based on the Dynamic Food & Beverage Intellidex Index and has a 0.50% management fee.

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The bottom line is these vice ETFs have the added benefit over dedicated whisky/whiskey of including a range of sectors. This offers greater diversity and exposure to a variety of vices including alcohol.

Whisky-Focused Funds

Another way into investing for whisky fans is through the Single Malt Fund. This is a fund that primarily invests in limited-edition bottlings of whisky. The company’s prospectus has approval from Sweden’s financial supervisory authority and the fund is listed on Stockholm’s Nordic Growth Market.

The Single Malt Fund has close commercial bonds with the whisky industry. This allows the fund to act as an interface between whisky investors and the whisky industry, including distilleries.

Another appealing option is the VFund, a multi-strategy fund focusing on whisky. It benefits from both industry knowledge as well as direct access to China’s booming premium whisky market.

VFund invests not only through direct investments by acquiring casks and premium Scotch whisky bottles, but also through equity investment in businesses relating to whisky.

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.

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 favored alternative investments such as art, rare coins, and fine wine.

Undeniably in an economically turbulent world, 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.

Governments often impose stricter regulations and higher taxes on products considered to be vices, such as alcohol and tobacco, in an effort to control consumption and generate revenue.

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 in national and political opinion or trends can dramatically impact these markets.

Should I Invest in Alcohol ETFs?

Each of the avenues to alcohol investing has its 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.

Investing in Alcohol Stocks ETFs

Investing in the alcoholic beverage industry has never been more exciting, especially with the rise of specialized exchange-traded funds (ETFs) focusing on alcohol and spirits. A liquor stocks ETF offers a diversified portfolio that includes some of the biggest names in the industry, from breweries to distilleries. Or a range of companies that produce everything from whisky to vodka to gin.

For those looking to narrow their focus, specialized funds like the whiskey ETF and bourbon ETF have emerged. These investment funds track a whiskey index fund, offering exposure to companies that specialize in the production and distribution of these specific spirits.

The best alcohol ETFs often combine a mix of these specialized and broader funds, providing a balanced investment in the alcoholic beverage sector. Whether you're interested in a general vice ETF or a more niche spirits ETF, the market offers a plethora of investment options.

Consumer Staples ETFs

For investors interested in the alcohol industry, there are not many ETFs exclusively focused on alcohol but broader consumer staples ETFs could offer an alternative approach. These ETFs often include significant holdings in major beverage companies alongside other consumer goods producers:

• Consumer Staples Select Sector SPDR Fund (NYSEARCA: XLP): This ETF offers exposure to companies from the consumer staples sector, including some of the world's largest alcohol beverage companies.

• Vanguard Consumer Staples ETF (NYSEARCA: VDC): Similar to XLP, this ETF focuses on the consumer staples sector and includes holdings in major alcohol producers.

Vice ETFs

Investing in vice ETFs, also known as "sin stocks," typically involves sectors like alcohol, tobacco, gambling, and defense. These sectors are often considered recession-resistant, making them attractive during various market conditions. Here are some ETFs that focus on such areas:

• AdvisorShares Vice ETF (ACT): This ETF invests in U.S. companies that derive a significant portion of their revenue from the alcohol, cannabis, and tobacco industries. It's designed for investors looking to capitalize on the growth and legal changes in these sectors.

• ETFMG Alternative Harvest ETF (MJ): While primarily focused on cannabis, this ETF includes companies across the cannabis industry, from cultivation and production to biotech firms focused on cannabis research. It's one of the more popular options for investors interested in the cannabis sector.

• Invesco Dynamic Leisure and Entertainment ETF (PEJ): This ETF covers the leisure and entertainment sector, including companies in gambling, hotels, restaurants, and leisure facilities. It's a broader take on vice investing, incorporating a wider range of leisure activities.

• Consumer Staples Select Sector SPDR Fund (XLP): Although not exclusively a vice ETF, XLP includes major tobacco and alcohol companies within its holdings. It's a good option for those looking to invest in vice industries indirectly while also maintaining a broader portfolio within the consumer staples sector.

• Roundhill Sports Betting & iGaming ETF (BETZ): This ETF focuses on the online sports betting and iGaming industries, including companies that operate in online gambling, sports betting, and related activities. It's a targeted way to invest in the growing online betting market.

• SPDR S&P Aerospace & Defense ETF (XAR): Again, not strictly a vice ETF, but it offers exposure to the defense sector, including manufacturers of military equipment and providers of defense services. It's suitable for investors looking to gain from the defense industry's stability and growth potential.

*Article Updated March 2024