Does excluding sin stocks cost performance?

David Blitz and Laurens Swinkels

Journal of Sustainable Finance & Investment, 2023, vol. 13, issue 4, 1693-1710

Abstract: We examine the impact of excluding sin stocks on expected portfolio risk and return. Exclusions involve risk relative to the market and peers. We show how this tracking error can be translated into an equivalent loss in expected return, which is negligible at low tracking error levels, but not at higher levels. However, even modest ex ante tracking error levels may lead to sizable compoundedunderperformance ex post. Taking an asset pricing perspective we find that popular exclusions typically go against rewarded factors such as value, profitability, and low risk, which is harmful for expected portfolio returns. Theoretically sin itself may also be a priced factor, but this is not yet supported by the empirical evidence. Tracking error may be minimized and expected portfolio return restored by filling the gap left by excluding sin stocks with non-sin stocks that offer the best hedging properties and similar or better factor exposures.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1080/20430795.2021.1972789 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jsustf:v:13:y:2023:i:4:p:1693-1710

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/TSFI20

DOI: 10.1080/20430795.2021.1972789

Access Statistics for this article

Journal of Sustainable Finance & Investment is currently edited by Dr Matthew Haigh

More articles in Journal of Sustainable Finance & Investment from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().