Breaking down indexes for beginner wine investors
Sitting down at the end of a hard day and swilling a glass of red is a cathartic experience enjoyed by people all over the world. For many, their relationship with wine starts and ends there – but it doesn’t have to.
The fine wine market only really kicked into gear in the 1970s, but has quickly become one of the world’s most popular alternative assets. It’s uncorrelated to traditional stocks, performs well in economic downturns and continues to expand beyond its European roots.
Yet, there are still a couple of problems. Buying and storing valuable bottles of wine can be time-consuming and expensive – not everyone has a cellar. And how do you resist the temptation to drink it? These are the best bottles of wine in the world, after all.
That’s where indexes come into the picture.
What is an index?
Think of an index as a picnic basket carrying ten bottles of different wines. That’s essentially how an index works – it tracks the value of a group of assets.
Perhaps the most well-known index is the S&P 500, which tracks the performance of the United States’s top 500 companies. So instead of an investor individually buying stock in companies like Amazon, or Apple, they can invest in a fund – usually an exchange-traded fund (ETF) – that tracks the index, giving them exposure to all these companies at once.
Indexes are popular for this reason. By spreading risk among several assets rather than just one, investors mitigate the potential of one or two bad trades ruining their portfolio.
Caption: S&P500 performance Source: Google
The same principle applies to a wine index. It measures the performance of a market (or sub-market) of investment-grade wines. Rather than using the average price of all bottles, wine indexes are typically weighted depending on a certain asset's price, scarcity or popularity.
It’s worth noting that not all indexes can be bought on the stock market. Some are exclusively used as data points to help inform investment decisions within a certain asset class.
What are the most popular wine indexes?
There are several wine indexes out there, but when it comes down to it, one stands head and shoulders above the rest.
It’s the Liv-ex.
The company has been around since 2000, founded by James Miles and Justin Gibbs. It has since become the world’s biggest resource for wine indexes.
Liv-ex Fine Wine
Liv-ex has three major Fine Wine indexes – the Fine Wine 50, 100 and 1,000.
The Fine Wine 100 is the clear industry standard for examining the wine market’s performance. It consists of the 100 “most sought-after wines” traded by the world’s top wine merchants.
Since the Fine Wine 100’s inception in 2002, the index has increased in value by nearly 400%. Its 5-year performance is also solid, coming in at 24.4%.
Examples of wines it includes are:
- Domaine de la Romanee-Conti 2018 Vintage, valued at €58,639
- Chateau Angelus 2016 Vintage, valued at €3,060
- Giacomo Conterno, 2013 Vintage, valued at €9,400
Source: Liv-ex
The Fine Wine 50 tracks the performance of, you guessed it, 50 popular bottles of vintage wine. Spanning all the way back to 1999, the index comprises the 10 most recent vintages of Lafite Rothschild, Margaux, Mouton Rothschild and Haut-Brion. It also includes the price movements of the 2005-14 vintages of Latour.
Caption: Liv-ex Fine Wine 50 Index Source: Liv-ex
Finally, the Liv-ex Fine Wine 1000 follows the value of 1,000 wines from all over the world. Rather than consisting of individual bottles of wine, this broad index is actually an amalgamation of seven smaller indexes, like the Bordeaux 500 and the Rest of the World 60 (more on these later).
Source: Liv-ex
Liv-ex Regional Indexes
The wine market is a little like the property market. Think about it this way – the average Australian house price wouldn’t give you much insight into how the Sydney market is performing.
The same concept applies to wine. Although the major indexes provide a look into how the overall fine wine market is performing, there are many different sub-markets with unique quirks and trends.
Source: Liv-ex
Take the Champagne 50, for example. This index tracks the most recent and popular vintages of 13 of the region’s revered Champagne houses. Over the past five years, this index is up by 71.7%. – or 14% annually.
However, if we travel across the Atlantic, the performance of the California 50 is far less impressive. This index includes some of Napa Valley’s prestigious wineries, including entries from Screaming Eagle and Opus One. Yet, over the past five years its value has only appreciated 18% – barely tracking above inflation.
Other regional indexes include:
- Liv-ex Bordeaux 500, 5Y +12.5%
- Burgundy 150, 5Y +67.6%
- Italy 100, 5Y +43%
- Rest of the World 60, 5Y +14.1%
The variance in long-term index performance demonstrates the importance of diving deeper into sub-markets when investing in wine. An overall index like the Liv-ex 100 is a great starting point – but it can be easily misinterpreted without further analysis.
Indexes on the stock market
Unfortunately, very few publicly-traded indexes focus exclusively on the wine market. Some private funds do exist, but these can be expensive with a steep barrier for entry. Investors that want exposure to wine while sticking to Wall Street have one real option – Consumer Staples Indexes.
Let’s be clear here. Consumer Staple funds are composed of tiny percentages of wine companies. Buying one of these ETFs will not reap performances akin to the Liv-ex fine wine indexes.
But, they can be a decent middle-ground for investors wanting a stockbroker's convenience.
Perhaps the biggest fund is the iShares Global Consumer Staples ETF, managed by financial giant BlackRock. The fund’s biggest wine-related asset is Diageo, which comprises 2.5% of the portfolio. The portfolio also includes a 1% exposure to Constellation Brands. Over the past five years, the iShares Global Consumer Staples ETF is up nearly 40%.
Source: iShares
Other options include:
Summary
Indexes are a powerful tool that most investors should utilise at some point in their financial journey. They provide access to a broad, diverse portfolio of assets, and help investors avoid putting all their wine eggs into one basket.
Whether you use Liv-ex to follow sub-market trends, buy into a Consumer Staples ETF, or build a collection of wine, we recommend one thing – don’t drink away your investment!
Okay… maybe just a glass.
