Newly formed investment adviser The BAD Investment Company has debuted a namesake ETF targeting market segments that are typically avoided by ESG funds.
The ETF provides exposure to industries typically shunned by ESG-focused funds.
Listed on NYSE Arca, the BAD ETF (BAD US) provides exposure to companies from ‘B.A.D.’ industries, namely Betting, Alcohol (& cannabis), and Drugs.
According to The BAD Investment Company, BAD is suited for investors who may be frustrated with aspects of the ESG movement such as a perceived lack of a consistent investment framework and the potential to sacrifice returns by crudely excluding certain industries.
The firm notes that vice industries may present a compelling proposition owing to how companies in these industries are often “shunned” by investors and are therefore underinvested.
Alongside diversification benefits and the potential for competitive risk-adjusted returns, the fund may also provide investors with defensive characteristics as “people often continue to do BAD things regardless of economic conditions”.
Tommy Mancuso, President and co-Founder of The BAD Investment Company, commented: “With the proliferation of whitewashed ESG products and market sub-segments like sports betting and cannabis becoming more widely accepted socially and legally, we saw an opportunity to fill what we perceived as a gap in the marketplace. We came to that conclusion primarily by listening and watching this newly energized retail crowd over the past year. We believe they want investment products rooted in transparency and quality that they may also be able to understand and relate to as consumers whether that is in health, wellbeing, or entertainment.”
Mancuso added, “Many new or retail investors may have a misconception and a ‘to the moon’ mentality when it comes to investing. As exciting as that may sound, we believe they should focus on long-term investing and sustainable areas of the market that have historically demonstrated to be profitable and withstood multiple economic cycles.”
Methodology
The fund is linked to the EQM BAD Index which was developed by EQM Indexes, an index provider versed in the application of smart beta and thematic investment strategies. The index is independently calculated and distributed by Solactive.
The index selects its constituents from a universe of US-listed equities, including American Depositary Receipts, of companies that have average daily trading volumes above $1 million and that derive at least half of their revenue from B.A.D industries.
Betting firms include casinos, gaming establishments, and online gaming operators, while companies in the alcohol/cannabis industries consist of alcoholic beverage manufacturers and distributors and those involved in the cultivation and sale of cannabis. Firms within these segments must have market capitalizations in excess of $1 billion to be eligible for inclusion.
Companies within the drugs industry include developers and manufacturers of pharmaceutical and biotechnology products which have market capitalizations greater than $10bn.
Eligible constituents are weighted equally within each of the three B.A.D categories while capping the aggregate weight of cannabis companies at 10%. The index is reconstituted and rebalanced quarterly.
As of 29 December, the fund had 56 holdings with the most notable positions being Duckhorn (2.6%), Constellation Brands (2.5%), Diageo (2.5%), Anheuser Busch (2.5%), and Brown Forman (2.4%).
The ETF comes with an expense ratio of 0.75%.
BAD is not the first ETF to target the vice theme. In December 2017, AdvisorShares introduced the actively managed AdvisorShares Vice ETF (VICE US). The fund, which currently houses $12 million AUM and costs 0.99%, has underperformed the S&P 500 since inception, delivering an annual return of 6.87% compared to 16.64% for the index. The underperformance is largely a function of the ETF having minimal exposure to technology stocks which have driven the market higher in recent years.