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Investing in The Future of Entertainment: eSports & Gaming ETFs

Digital entertainment has quickly emerged as a powerful, disruptive trend as it is becoming the new mode of entertainment under the post-COVID-19 new normal.

Photo by Florian Olivo on Unsplash

In particular, the current generation of young adults increasingly see playing and spectating video games as a new norm, replacing traditional entertainment such as live media, sports and entertainment. Over the past few years, esports and game streaming have rapidly moved from the fringe to the mainstream and viewership is challenging that of traditional sports.

For those who want to invest into the emerging trend, this article seeks to explore one key method: thematic Exchange Traded Fund (“ETFs”). We will explore some ETFs we are looking at and explore the nature of these investment options.

Some eSports ETFs we are looking at

In the past few years, several ETFs have been launched to track the performance of indices on eSports. Like other thematic ETFs in the market, they consist of stocks across industries and geographic regions to capture the growth potential of the entire eSports ecosystem.

Four ETFs (with their launch dates) currently in the market include:

  1. VanEck Vectors Video Gaming and eSports UCITS ETF (ESPO) (Oct 2018)
  2. Global X Video Games & Esports ETF (HERO) (Oct 2019)
  3. Wedbush ETFMG Video Game Tech ETF (GAMR) (Mar 2016)
  4. Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD) (Jun 2019)

We provide a brief analysis of the four ETFs by looking at:

a. Recent performances

b. Index composition and methodology

c. Asset Under Management (“AUM”) and trade volume

d. Expense ratio

e. Number of holding

A. Recent Performance:

During the coronavirus period, eSports ETFs have delivered a stellar performance with double-digit YTD returns. This is due to the sector’s resilience and quicker recovery against the broad market, which is still incurring a loss of 4.87% YTD.

Source: ETF.com; data as of June 2, 2020

B. Index composition & methodology:

GAMR and NERD share a similar “tiered” index weighting method, categorizing stocks into pure play and non-pure play. GAMR holds 90% on the pure play and non-pure play categories, with the remaining 10% on conglomerates that broadly support the gaming industry. NERD uses a scoring system to categorize stocks into pure play, core, and non-core, then ensures that at least 80% of the fund’s exposure is on the pure play and core categories.

ESPO and HERO both utilize a “market capitalization” weighting method, and these two ETFs also have a rule to include only companies that generate at least 50% of their revenues from gaming and eSports.

All four ETFs screen their holdings by a minimum market capitalization of USD 100–150m. ESPO has taken slightly more stringent measures to ensure its liquidity by including companies whose minimum average monthly trading volume is 250,000 shares per month over the past 6 months.

C. AUM and trading volume:

Source: ETF.com; data as of June 2, 2020

By June 2020, ESPO has the highest assets under management, almost doubling the second largest eSports ETF. This growth must have happened recently as a strong net YTD inflow of USD 133.81m is observed. Several factors to be discussed in the next sections can contribute to the fund flow on these ETFs. Meanwhile, with such high fund inflow, ESPO also has the highest 3-month average trading volume among the four eSports ETF. It is also interesting to see that GAMR has recorded a net fund outflow during this period when the eSports investment theme is gaining popularity.

D. Expense ratio:

Source: ETF.com; data as of June 2, 2020

Many would expect that in the ETF space, there is a first mover advantage, where investment money will stay with the ETF that is launched the earliest in a particular theme. Counterintuitively, as mentioned in the previous section, GAMR has seen some outflow of funds this year despite the fact that it was the oldest fund. This could possibly because of its higher expense ratio (see chart above).

E. Number of holdings:

Source: ETF.com; data as of June 2, 2020

As shown in the chart, ESPO and NERD hold fewer stocks than the other two ETFs, suggesting that they are highly concentrated. Between these two ETFs, ESPO has a higher weighting on the subsector of hardware makers such as NVIDIA and AMD, while NERD has more diversified holdings including Modern Times Group (tournament organizer/broadcaster) and AfreecaTV (broadcaster/streaming service). These subsector weightings also explain why ETFs with the same investment theme can deliver different results. Since share prices of hardware makers have gone up significantly after the sell-off, ESPO was able to double NERD’s return so far this year.

On the other hand, GAMR’s number of holdings is significantly larger than the other eSports ETF. As its index composition allows conglomerates that support the eSports ecosystem to be an index constituent, one can find among GAMR’s stock holdings (such as Apple, Microsoft, Sony and Alphabet) to have derived majority of their revenues in business divisions other than gaming and to be overlapping with other broad equity indices. Investors who are looking to add unique exposure of the eSports theme may pick other ETFs which have a stronger focus on companies that are closer to the core of gaming than GAMR instead.

With more stock holdings, HERO has a less concentrated exposure than ESPO, yet they are delivering similar return to date. It looks like compared to ESPO, HERO has more online or mobile game developers and platforms, with more companies outside of North America (such as Nexon, NetEase, and NCSoft).

Conclusion

There are various publicly-traded companies that provide a broad range of exposure to the digital gaming and eSports market. ETF provides a way to diversify your investments across a number of sub-sectors such as game developers, live-streaming and media and eSports event organization. The underlying growth driver remains dependent on how players and users around the world continue to spend an increasing amount of time and resources on this emerging mode of entertainment.

By: Jose-Antonio Wu

(The article is intended for educational purposes only and does not constitute investment advice. Disclosure: The author may hold some investment in the ETFs mentioned in the article.)

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