Owning My Sin Premium

I’m an index investor, which obviously means I don’t pick stocks. It’s a comfortable position. When you own the entire market, you’re not making choices, you’re just participating in the market as a neutral observer.

My strategy has always been simple: buy broad index funds, reinvest the dividends, ignore the noise. No stock picking, no market timing, no cleverness required. The kind of investing you can explain at a dinner party without boring your guests too much.

I’m rotating some capital into the developed Europe index at the moment. This got me reading one of those breakdowns of what you actually own when you buy an index fund. Pages of holdings, sorted by weight. The usual suspects at the top, technology, healthcare. Then, scattered throughout in smaller percentages, there they were: tobacco companies, defense contractors, gambling operators, alcohol producers.

I’d never really thought about it much. That’s rather the point of index investing, isn’t it? You don’t think about it. You own everything, which means you own nothing in particular. Responsibility gets delightfully diluted across thousands of holdings.

But all the war that’s on the news, stories of big tobacco fighting a rearguard action in the developed world and pushing for bigger market share in the developing world makes you think: I own a tiny slice of those companies. Not because I chose to invest in arms manufacturing or tobacco specifically, but because they’re part of the index. Which means every quarter, I’m slightly enriched by their dividends.

The sin stocks are there, performing exactly as the research suggests they should. Outperforming more often than not. Propping up the index returns that I’m receiving in retirement. The structural advantages are all present, regulatory moats, demand, high dividends. They’re profitable precisely because they’re selling products people can’t or won’t stop buying.

And I benefit from that. Passively, automatically.. But I still benefit.

I could switch to an ESG index fund. They exist now, plenty of them. Screen out tobacco, weapons, gambling, whatever offends your particular conscience. The performance would probably be fine, maybe slightly lower. The expense ratios are higher.

But I haven’t done it. Time will pass and I’ll still be in the same broad market funds. The sin stocks will keep performing. My retirement accounts keep ticking upward. ESG seems a bit suspect to me, maybe I’m just too cynical.

Why not change? Partially inertia and my cynicism of green washing, I suspect ESG is mostly a solution to the appearance of the problem rather than the problem itself and I’m not paying a premium for PR work. Also performance. Those sin stocks genuinely do boost returns. Mostly, though, I think it’s because making the switch would require acknowledging something I’d rather not: that there’s no such thing as truly passive investing. Every portfolio is a choice, even the ones that claim to be neutral.

The Sin Premium is real. It’s in my portfolio right now, boosting my returns in ways I honestly don’t examine too closely. And I suppose, talking about honesty, that’s the most honest thing I can say about it all.