Alcohol, Drugs & Taxes

Alcohol & Taxes

Upside and downside of coming of age

USA

AdvisorShares lists an ETF for those without a conscience

Are you sick of ESG ETFs? Do you think the whole ESG movement is silly virtue signalling by self-interested global corporations? 

Or do you simply not believe the hype about ESG outperformance? Then AdvisorShares has an ETF for you.

Actively managed ETF specialist AdvisorShares is listing a new ETF that pays due tribute to drugs, booze and cigarettes, The AdvisorShares VICE ETF (ACT). The fund will invest in companies that make the majority of their money from the tobacco, alcohol or cannabis industries, the prospectus says. It will invest in the stocks of US companies, and seek exposure to the newly-legalised cannabis industry by buying companies that make “cannabis or cannabinoid-related products”. Cannabinoid was a new word for this writer (honestly!).

“Even in the toughest economic environments, people still historically spend on their leisure, habits and vices. Alcohol and tobacco have been often viewed as recession-proof areas simply because individuals take pleasure in such related activities during both good times and bad times,” AdvisorShares said.

“Investing in select alcohol and tobacco companies will provide continued growth and long-term performance... Coupled with the continuing societal acceptance and regulatory approvals of cannabis.”

Analysis

The trend towards ESG has been one of the defining themes of ETFs in 2017. It’s being driven by intergenerational divisions within rich families. As millennials come to inherit their family offices, money managers are being forced to take stock of the values of the young who will, in the coming years, come to control their families’ businesses and assets. The epochal shift to ESG has been backed up by a flotilla of academic and not-so-academic studies showing that ESG products can outperform.

The listing of ACT will come as a direct challenge to the growing ESG ETF movement. As is common knowledge, tobacco companies are often star performers. Big Tobacco often trades at a discount relative to performance because many investors steer clear of what they regard as a socially unhelpful type of business.

What will be more interesting about ACT will be whether its cannabis gambit pays off. While often lumped together as similar and similarly base consumer goods, tobacco and cannabis are very different. Cannabis is a weed that can be grown in someone’s backyard. Tobacco, however, requires concentrated capital (fertilisers, pesticides, water-intensive cultivation). Tobacco thus lends itself to businesses in a way that marijuana does not. One of the most interesting features of this ETF, and one of the great unknowns, is how it will make any money from the Woodstock weed.   

Corporate actions

BlackRock Germany hit with accounting errors

BlackRock’s German-domiciled iShares ETFs have been stung by several years of accounting errors owing to mismanagement from State Street, BlackRock has said. The errors could leave BlackRock’s German investors with new tax bills.

In a press release, BlackRock blamed State Street, which administers some of its German ETFs, for a series of accounting errors that misclassified corporate actions as capital gains and income. The errors have meant that “some fund distributions or accumulations were not appropriately calculated,” BlackRock said, and mean that BlackRock’s German investors may be slapped future tax liabilities.

“It is possible, though not probable, that 22 of these 41 German-domiciled iShares ETFs…may be subject to future tax assessments,” BlackRock said.

“Guidance is awaited from the relevant tax authorities on the non-EU Returns of Capital and the timing of this is currently not known.

“The purpose of this announcement is to make investors and market participants aware of corrective action BlackRock will take in light of the tax assessments received for the 41 funds.”

Because ETFs own shares in many companies, they are often tied up in corporate actions of various kinds, particularly in the US. This can mean ETF investors can be hit with a – usually very small – gain when companies are sued by their owners.

Because the numbers involved are usually very small, the additional tax liabilities, as BlackRock indicated, will likely be small.  

State Street is the administrator for a number of providers, we shall reach out to them and see if they are also affected.