If a business does well, the stock eventually follows.
- Warren Buffett
The VanEck Vectors Video Gaming and eSports ETF (ESPO) focuses on tracking a rules-based, modified, capitalization-weighted, float-adjusted index of fewer than 30 companies. All companies are involved in video gaming and eSports (also known as electronic sports) software, hardware, and development, including casinos and online betting. These companies must have at least half of their revenue from those businesses. This ETF is part of VanEck's suite of niche and thematic funds.
This ETF has increased by 55.28% year to date, as it has benefited mainly by the video games sales surge owing, in part, to the coronavirus pandemic. On a 3x-year basis, it has increased by 93.23%. It is much higher than S&P 500's performance of 25.41% and has beaten many of its peers.
Top 10 holdings account for 60.13% of the portfolio, dominated by Nvidia (NVDA), Advanced Micro Devices (AMD), Tencent (TCEHY), Nintendo (NTDOY), and Sea Limited (SE).
U.S. equities account for 34.29% of the portfolio, followed by Japan (22.79%), China (18.47%), and South Korea (15.05%). Sector-wise, it has a strong focus on Communication Services (83.6%) and Technology (11.7%). ESPO has an evident focus on the video gaming and eSports industries; thus, it's a great addition to an investor's portfolio if the investor wants to bet on it. It charges a management fee of 55 basis points, which is pricey for passive funds but in line with other excellent products.
Strong growth potential in both video game and eSports
Semiconductor manufacturers and video game publishers are driving ESPO's hyper run, but let's not forget about the eSports part of the equation and the enormous potential growth.
VanEck mentioned in a recent note, "News of sold-out stadiums, multi-million dollar franchise fees for professional teams and big-brand sponsorship deals have driven the eSports mania narrative. However, comparing eSports revenues to the broader video game industry can help keep things in perspective. According to Newzoo, out of the $159 billion in revenue that the global video gaming industry is expected to generate in 2020, roughly $1.1 billion will be generated by eSports. In other words, the global video gaming industry should generate around 144 times the revenue of the global eSports industry in 2020."
Over the years, eSports has proven itself to be a growing industry. The coronavirus pandemic has particularly highlighted the increasing synergies between eSports leagues and software publishers. Growth in eSports betting and media revenue are two additional, long-term catalysts for ESPO.
"Publishers own the rights to the games played in the competition, as well as the broadcasting rights, which are sold to media and communication services companies (like Twitch and Facebook)," said VanEck. "According to Goldman Sachs, media rights are expected to grow from representing around 20% of all eSports revenues to 40% by 2022. This means that, after factoring in other revenue sources like sponsorship and game publisher fees, video game publishers are in a position to own the majority of revenues coming from eSports potentially."
eSports makes audiences aware of the increased amount of video game engagement across various streaming services, gaming platforms, and now eSports. It is particularly notable during the pandemic, given how traditional sports have all been canceled. Many athletes, as well as consumers, have transferred over to eSports as a result of it.
It's easy to conflate video game publishers and eSports operators, but the truth is that these segments are intersecting, and it brings enormous opportunities for investors.
"Over the past few years, video game publishers have invested millions of dollars in developing, launching, and running professional eSports leagues," according to VanEck. "Previously, eSports leagues were run by independent third parties separate from the publishers who make the games. We believe this development result is that video game publishers are now primed to gain the most from the eSports phenomenon."
ESPO presents excellent opportunities for ETF investors because the publicly traded pure-play eSports universe is still small, and many of the stocks that have that status don't yet qualify for entry to ETF benchmarks
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