Who Else Wants A Beer ETF?

by on February 9, 2011 | ETFs Mentioned:

The emergence of ETFs have given investors new, low-cost tools to gain exposure to markets that would otherwise be difficult to reach. Numerous ETPs have successfully hypertargeted unique corners of the market, such as emerging market debt, rare earth metals, and small cap gold mining funds. As investors grow more comfortable with diversifying their assets through a single ticker, the ETF industry continues to expand, to meet the rising demand of investors who have grown tired of the often inferior performance and high-costs associated with mutual funds. And still, with a rapidly growing industry, there are a wealth of intriguing market segments that ETFs have yet to capitalize on, one of them being beer brewers [see also Who Else Wants A Railroad ETF?].

From an investment standpoint, beer companies present a strong opportunity. While some of these firms may have exited their high growth stage, they manufacture a product that is unlike any other when it comes to market behavior. Many are quick to call alcohol a ‘recession proof’ product; while this may be an exaggeration, there is certainly some truth to that statement. In times of economic despair, though these companies may suffer losses, they typically perform better than other blue chip equities. In our most recent recession, for example, alcohol sales did take a major hit, but this must also be taken into context; these have been the worst economic conditions since the Great Depression. Looking further back, during the 2001 recession, Reuters found that alcohol consumption had actually increased. JP Morgan beverage analyst John Faucher commented that consumption increased during that period “because people tend to drink more during tough times”. In reality, alcohol can be safely classified as a recession-resistant investment, but it may be overboard to call it completely recession-proof. Meanwhile, in times of prosperity, alcohol sales tend to do quite well, as people tend to drink more of the product to celebrate just as much as when they are using it to drown their sorrows. This trend makes brewers an intriguing bull market investment during period of economic growth as well and thus an interesting play no matter what is happening in the broader economy [see also State Street Launches Three New Sector ETFs].

Beer Market

To get a better idea of just how much beer the world consumes, investors need to understand the bare facts. The United States consumes 81.6 liters per capita on an annual basis, making the country the 13th largest consumer globally. In first place sits the Czech Republic (156.9 liters), followed by Ireland (131.1 liters), and Germany (115.8 liters). That means that on average, each person in the U.S. drinks roughly 21.5 gallons of beer per year. Multiply that out by our current population of 300 million (a conservative figure), and that totals to approximately 6.5 billion gallons of beer consumed every year by the U.S. alone. Compare this to the approximately 7.76 billion gallons that China consumes per year, and these companies present themselves as strong investment opportunities for investors who believe that surging Chinese consumption will also translate into higher levels of beer sales as well. These figures also show just how much of a staple beer truly is, and that even though penetration levels are extremely high in developed nations in Europe and North America, a huge market still exists in emerging nations across the globe where discretionary incomes are starting to accelerate at an incredible pace. Furthermore, unlike cigarettes for example, regulatory issues are minimal suggesting that the market will face less roadblocks than its tobacco cousin has seen in its expansion plans [see also Is The Ireland ETF Doomed?].

Lucrative Industry

Currently, there are a handful of brewers who dominate the global market. According to volume of sales for 2009, the list of most successful brewers is as follows: Anheuser-Busch InBev (350 million hectoliters), SAB Miller (250 million hectoliters), Heineken (200 million hectoliters), Carlsberg (125 million hectoliters), and Tsingtao (50 million hectoliters). The first four companies from that list, make up over 50% of the global market share for beer, which is no surprise since they are home to the biggest global brand names: Budweiser, Bud Lite, Miller Lite, Heineken, etc. Other major names in the top ten global brewers include Molson-Coors and Group Modelo.

Aside from heavy sales volumes, these companies also draw in major revenues annually. Anheuser-Busch InBev brought in $36.76 billion last year, while SAB Miller raked in $18.7 billion. All of these strong figures are topped off by hefty market caps, ensuring that these companies fall on the safer side of investing (Anhueser-Busch InBev and SAB Miller have current market caps of $92.34 and $32.88 billion respectively) [see also Q&A With Matthew Patterson: Are Bond ETFs Broken?].

Beer ETF

Currently, these major brewers are virtually non-existent in the exchange traded world, but their financial statuses demand a second look. Perhaps the reason for this absence is that the top five brewers are all based abroad. Though they operate numerous subsidiaries in the U.S., these companies can be hard to reach for the average investor, which is where an ETP can step in to help, connecting prospective investors to firms that would otherwise be out of reach. Currently, Anheuser-Busch InBev and SAB Miller are not represented in any ETF, in fact one of the few brewers to even make its mark in the exchange traded world is Molson-Coors, which accounts for about 4.8% of First Trust Cons. Staples AlphaDEX Fund (FXG).

Possible Fund Breakdown

A beer ETF should have a fair amount of international exposure, including emerging markets, where many breweries are now seeing high levels of sales growth. While the holdings may present a large portion of international exposure, the fund will still have heavy ties to America, as a large portion of revenue streams from many of these brewers– such as InBev–comes from American consumption. To take advantage of both markets, this ETF could have an exposure breakdown of 70% international and 30% domestic. This fund can be largely based on giant or large cap exposure, by allocating to the aforementioned firms, but there are also strong opportunities for smaller brewers, like Boston Beer Company (Samuel Adams), to make up a portion of this proposed ETF as well in order to help avoid heavy concentration in some of the largest firms. The best part about this hypothetical fund? An available ticker, BREW, could make for an attractive marketing campaign.

Disclosure: No positions at time of writing.