The Originial SINdex: Recession-Proofing With Tobacco and Liquor

by: Gary Gordon

The Street's initial reaction to a 1/4 rate cut by the Federal Reserve? Sell stock assets. Apparently, investors fear that the Fed is not being aggressive enough in its recession-fighting activity.

If the Federal Reserve is cutting interest rates (though not as fast as some of us would prefer) is it really time to be running for cover? If we are going to hit a recessionary period, does that mean stocks are the asset class to avoid?

FocusShares may have come up with an intriguing elixir: specifically, the brand new ETF family developed an index of mid- and large-sized companies involved in liquor, cigarettes and/or casinos. Specifically, the companies include owners and operators of casinos, producers of beer and malt liquors, distillers, vintners and producers of other alcoholic beverages, as well as cigarette manufacturers. (Even the ticker symbol "PUF" aims to please investors who like the "sin" space.)

Regardless of how one may personally feel about boozing, gambling, and smoking... a whole lot of people drink, smoke and gamble. What's more, a whole lot of people will be doing it whether or not the U.S. economy goes into a recession.

It follows that FocusShares ISE SINdex Fund (PUF) may be recession-proof and profitable. Back-tested data provided by the International Securities Exchange and FocusShares LLC show outstanding returns for the "SINdex" during the last recession; that is, the "SINdex" gained 25% from 10/1/2000-11/30/2001 while the S&P 500 lost 20% over the exact same period!

The "SINdex" has an equal weight methodology. Essentially, the intent is for each company to account for roughly 5% of the index itself.

One problem that is difficult to ignore: FocusShares LLC is a brand new entity. It's not surprising to see the exceptionally light volume on FocusShares ISE SINdex Fund (PUF). (This may make buying or selling at a particular price more challenging.)

Many may also feel that the S&P Select Consumer Staples Fund (NYSEARCA:XLP) adequately defends them in a recessionary period. However, XLP only gained 1% from 10/1/2000-11/30/2001 whereas the "SINdex" racked up 25%.

FocusShares ISE SINdex Fund (PUF) may have the right idea... and it's hard to see the index itself faltering in a no-growth/slow-growth economy. If there's going to be a misstep, it won't be the companies in the "SINdex;" rather, FocusShares LLC may simply fail to ignite as an exchange-traded fund provider.

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