In a world where the ETF industry is pivoting towards environmentally and socially conscious investing, the folks at the BAD Investment Company are headed in the opposite direction!
This week, it launched its first fund - the B.A.D. ETF (BAD). As the name suggests, it will invest in a portfolio of stocks that market watchers might consider "bad". In particular, it focuses on three industries
- Betting – casinos, gaming, and online gaming operations
- Alcohol/Cannabis - alcoholic beverage manufacturing and distribution and/or cannabis cultivation and sales
- Drugs - pharmaceutical and biotechnology product development and manufacturing
Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!
The fund will track the EQM BAD Index, which targets companies deriving a majority of their revenue from one of the three categories listed above. After meeting minimum liquidity and market cap requirements, qualifying components are allocated according to industry. At the time of each reconstitution, each business category is equally weighted at 33 1/3%. Within each category, the companies are equally weighted, provided, however, that the Fund’s aggregate exposure to cannabis companies will not exceed 10% of the assets.
As it stands currently, BAD has 57 individual holdings and charges an expense ratio of 0.75%. Among the names included in the portfolio are Molson Coors (TAP), Tilray (TLRY), Pfizer (PFE), Penn National Gaming (PENN), MGM Resorts (MGM), Las Vegas Sands (LVS) and DraftKings (DKNG).
The thing I love about this fund (other than its investment case, which I'll get to in a second) is that the company is clearly having fun embracing the "bad is good" theme.
While most of Wall Street is figuring out ways to eliminate alcohol producers and weapons manufacturers and oil companies from portfolios, a few companies out there are actually embracing it. The natural comparison to BAD is the AdvisorShares Vice ETF (VICE), an actively-managed fund that targets alcohol, gaming and tobacco stocks. It's been around for about 4 years, but has only achieved modest success, garnering around $12 million in assets.
If you're able to separate the industry the company operates in from the investment potential of the industry itself, you'll see that there's actually a very logical opportunity here. You may or may not like them, but alcohol producers, cigarette makers and other "vice" companies are big cash cows. And they're durable acting almost like consumer staples. Regardless of the economic environment, people are probably always going to buy their booze and smokes in the same way they buy their toilet paper and toothpaste.
You can see how VICE performed in the aftermath of the COVID recession. It steadily outperformed the S&P 500 (SPY) for a solid year following the COVID bear market.
2021 has been the opposite story, of course, as investors have focused almost exclusively on mega-cap tech and growth stocks, but the potential of BAD as a satellite holding in a broader portfolio is definitely there.
BAD traded nearly $7 million worth of shares on its first trading day Wednesday, suggesting there's some interest out there for this type of investment, but these numbers tend to fall quickly and steeply in subsequent days.
We'll see how BAD fares, but it's definitely an interesting ETF.