Vice and Virtue in Exchange Traded Funds

The different and successive eras of finance have long been identified by the popular and new instruments of those times. This has been true for the 17th-century tulip craze, to the era of the joint stock company, and so on to the recently expired period of the complex collateralised debt obligation. Today, we are in the age of the Exchange Traded Fund. Vanguard founder Jack Bogle reports that ETFs now constitute nearly one half of all US stock trades. ETFs offer liquidity and easy diversification to individual investors, reducing the need for mutual funds and the fees they entail. Global ETF assets at the end of 2016 exceeded $3.3 Trillion. The popularity of ETFs has yielded the creation of instruments that track the performance of every major industry, geography, and category you can think of. Perhaps the most interesting of these has been the creation of the Barrier fund and its mirror, the Inspire Global Hope Fund.

Barrier (VICEX) and Inspire (BLES) seem to be mirror images of each other in terms of their stated aims. The former exists to provide investors an instrument to easily invest in companies that are in the business of pornography, cigarettes, gambling, and other morally “objectionable” offerings. The former is meant to offer a vehicle for investing in companies that are considered upstanding with respect to Christian values. This means no alcohol, no adult entertainment, and no weapons. Notably, BLES steers clear of companies that support the advancement of LGBTQ rights. However, the funds are not mirror images of each other. Unlike “bullish” and “bearish” industry ETFs, the funds are composed entirely differently. VICEX is invested in three main sectors: Consumer Cyclicals, Consumer Defensives, and Industrials. Meanwhile, BLES has holdings spread across all industry sectors. As such, it’s truly best to judge these funds on their merits separately, as opposed to in comparison

VICEX has been having a strong year. The fund has outperformed the S&P 500 by 4 percentage points, in the year to date. However, its performance prior to this year has told a different story. It has underperformed the market by roughly 3 percentage points. More tellingly, over the past 3 years, VICEX has underperformed the Capital Asset Pricing Model (CAPM) prediction of the fund’s performance. This means that, provided an investor is interested only in market risk exposure, they would be far better off investing in US Treasury Bonds and the market index, rather than in the Barrier fund. Given, market risk isn’t everything, and to some investors VICEX’s unique mix of assets may provide unique value. However, it would seem that the relatively high level of coverage and interest in the fund has driven investors to the fund in pursuit of the ETF’s novelty, as opposed to the actual value it represents in a passive model.

On the other hand, Inspire’s fund is relatively new, so the same depth of data isn’t available. That being said, had the fund existed at the time, Inspire’s large cap fund would have had a return of just 6.64% and a Sharpe ratio of .37 over the last year, underperforming the World Large Stock benchmark for excess returns as a percent of risk. This data might not be representative of the fund’s future performance, but it is indicative of the prevailing market conditions over the past 3 years with respect to the holdings of the fund. The end result is that, though the construction of the fund is entirely different from that of VICEX, it appears to be subject to the same market inefficiencies, provided it doesn’t hedge against some major class of risk that isn’t immediately apparent.

These two funds present prime examples of an apparent market inefficiency that appears as a result of the growing number, popularity, and coverage of highly novel ETFs. The news surrounding both compels investors to pursue these funds. An investor can feel rebellious investing in VICEX, and conversely responsible investing BLES. However, there is no apparent factor that compensates the investor for the below-market performance of these funds, and as such investing in them would appear to be irrational. Perhaps they will fade out of the public eye, just as exotic stock options have fallen out of fashion somewhat in the financial markets. Or maybe investors will prefer to speculate on the industries and holdings these funds represent. Only time will tell, and the answer will likely on be apparent in retrospect.


Gordon Milne

Works Cited

Authers, J., & Newlands, C. (2016, December 5). Exchange Traded Funds: Taking Over the Markets. Retrieved from Financial Times Web site:

Federal Reserve Bank of St. Louis. (2017, May 17). 3-Month Treasury Constant Maturity Rate. Retrieved from FRED Web site:

Inspire Investing. (2017, March 31). Inspire Global Hope Large Cap Equal Weight Index. Retrieved from Inspire Investing Web site:

Yahoo Finance. (2017, May 17). Northern Lights Fund Trust IV - Inspire Global Hope ETF (BLES). Retrieved from Yahoo Finance Web site:

Yahoo Finance. (2017, May 17). SPDR S&P 500 ETF Trust (SPY). Retrieved from Yahoo Finance Web site:

Yahoo Finance. (2017, May 17). USA Mutuals Vice Investor (VICEX). Retrieved from Yahoo Finance Web site:

Pictured titled, "Church", taken by yashima on October 6, 2009, obtained through Creative Commons (