Video game ETFs level up

May 14th, 2020 | By | Category: Equities

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ETFs providing thematic exposure to the video gaming industry have enjoyed a boost from the Covid-19 coronavirus pandemic, notching up gains of 33% on average since 20 March (the recent market bottom for video gaming stocks), compared to 24% for the S&P 500 (as of 13 May 2020).

Video Game ETFs Covid-19

The video gaming and eSports industry is winning now but faces several challenges in the months ahead.

In the US, the largest ETFs in the space are the $184 million VanEck Vectors Video Gaming and eSports ETF (ESPO US) and the $101m Global X Video Games & Esports ETF (HERO).

Behind these are the $85m Wedbush ETFMG Video Game Tech ETF (GAMR US) and the $15m Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD US).

ESPO, HERO, GAMR, and NERD come with expense ratios of 0.55%, 0.50%, 0.75%, and 0.25% respectively. The latter thanks to a fee waiver reducing its fee from 0.50%.

In Europe, the character selection is much diminished with just one dedicated pure-play video gaming ETF on offer, namely the VanEck Vectors Video Gaming and eSports UCITS ETF (ESPO LN), effectively a UCITS version of VanEck’s US product.

Perhaps because it is the sole outlet to satisfy video gaming exposure, it is the largest of them all with $221m in assets.

The LSE-, Xetra-, SIX Swiss- and Borsa Italiana-listed fund propelled past the $200m assets under management milestone at the start of this week on the back of healthy performance and robust net inflows – the ETF gathered $54m in April and a further $78m month-to-date in May.

AUM (in USD) – VanEck Vectors Video Gaming and eSports UCITS ETF (ESPO)

Level-up

Covid-19 has thrust the video game industry into the spotlight as millions of consumers, from furloughed workers to (supposedly) home-schooled children, seek to pass their free time from the safety of their home during the global lockdown.

Recent Q1 earnings reports from major video game publishers and developers, including the likes of Nintendo, Electronic Arts, and Activision Blizzard, recorded sales of video games and consoles jumping by roughly a third compared to the same period last year.

Many newly released games have proven popular, such as the new version of Animal Crossing and Call of Duty: Warzone, while the epic battle royale Fortnite has seen the number of registered online users swell to over 350m.

Yet the true growth story may really be attributed to eSports (organized, multiplayer video game competitions) which have exploded in popularity as the complete disappearance of real-world sports leads die-hard fans to get their viewing fix online.

Traditional sporting outfits have been quick to capitalize on this trend too. An eSports event held by NASCAR with actual racing professionals using simulator rigs drew over 900,000 viewers, making it the most-watched broadcast TV eSports event in history.

All this has led to a boost in earnings for game publishers (which often take the lion’s share of streaming revenues) as well as the streaming platforms themselves. Amazon’s Twitch, the largest provider of video game streaming, recorded a 60% increase in demand for March compared to the same period in 2019.

The success of eSports may be seen in the outperformance of ESPO and HERO which are up 16.4% and 14.8% year-to-date compared to 11.7% for GAMR. The SPDR S&P 500 ETF (SPY US) is lagging with a 12.0% loss.

ESPO, HERO and GAMR select their constituents from a global universe of stocks; however, ESPO and HERO pick companies with at least a 50% revenue exposure to video gaming or eSports, while GAMR focuses exclusively on the video gaming industry.

Boss fight ahead

While video game companies have so far sailed through the Covid-19 pandemic, many firms are striking a cautious note for the future.

Producing a blockbuster game involves large teams of developers, voice actors, motion-capture workshops, and sound studios. Coordinating these moving parts while adhering to social distancing policies and a work-from-home culture may prove challenging.

Other firms that offer cheap or free online games may find that their advertising revenue dries up in the second half of the year as sponsors trim their budgets to help stabilize their own struggling businesses.

A protracted recession is likely to strike the biggest blow to the industry as consumers scale back their purchases of non-essential goods. Both Microsoft and Sony are planning to release their next-generation Xbox and PlayStation consoles in the autumn, and a subdued response to these products may dent confidence in the sector.

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