VanEck Vectors Video Gaming and eSports ETF (ESPO) level up
Most investors have exposure to the FAANGM stocks however recent volatility has highlighted investor’s apprehensions about overpaying for their technology exposure.
One way to diversify is to look beyond the mega-cap tech stocks and consider the investment opportunity pertaining to video gaming and eSports.
Long-term structural trends favour the growth of video gaming and e-sports companies, as players and spectators flock to digital games. Global pandemic lockdowns have also supported crowds and the growth profile of listed game developers and console producers.
The industry’s growth has been phenomenal. Since 2015, video game revenues have grown at an annualised rate of 13%. By 2023, video game revenues could hit US$200 billion1.
Investors can gain exposure to opportunities in this thriving industry via the VanEck Vectors Video Gaming and eSports ETF (ASX: ESPO). ESPO offers a pure play and targeted exposure to leading video gaming and eSport companies, including publishers Tencent, Nintendo, Electronic Arts and Activision Blizzard. Not only has ESPO performed better than the broader US and global stock markets, its valuation looks attractive compared to other investment strategies providing technology growth exposure.
Long-term growth story
The spike in video gaming during the COVID-19 pandemic entrenches a trend which has been underway for several years. Electronic sports and video game engagement metrics have been setting records across several platforms, including broadcast TV, online viewership of gaming and player numbers.
There are 2.7 billion gamers globally; more than Facebook users, Apple devices and Netflix subscribers. Most people are under-exposed to this sector though. eSports and video games makes up only 4.85% of the NASDAQ 100 and only 3.71% of MSCI’s Information Technology sector.
Figure 1: Exposure to video gaming and eSports
Source: FactSet, as at 30 September 2020. Weightings represent weighting in respective comparable indices.
Video game and eSport exposure in the NASDAQ 100:
Activision Blizzard (0.54%)
Advanced Micro Devices (0.83%)
Electronic Arts (0.33%)
Netease Inc (0.29%)
NVIDIA Corp (2.88%)
Take-Two Interactive Software (0.16%)
Video game and eSport exposure in the MSCI World Technology Index:
Advanced Micro Devices (0.94%)
NVIDIA Corp (2.75%)
This makes the video gaming sector an attractive diversifier to the FAANG giants Facebook, Amazon, Apple, Netflix and Google owner, Alphabet. While FAANGs have powered the returns of the S&P 500 and NASDAQ in recent years, their volatility in September has stoked fears that their momentum could falter.
We believe however, that the uptick in video gaming and eSports in the wake of COVID-19 shows no signs of slowing.
Video game companies have been benefiting from unprecedented growth for a number of years. Based on back-testing after fees, the video game sector, as represented by the MVIS Global Video Gaming & eSports Index (ESPO Index net of management cost), outpaced the broader global equity market and the tech-heavy NASDAQ 100 index over the past five years.
Figure 2: Cumulative index returns
Source: Bloomberg, Morningstar Direct, VanEck as at 29 September 2020.
The above graph is a hypothetical comparison of performance of the ESPO Index net of ESPO’s 0.55% p.a. management fee, and the NASDAQ 100 and MSCI World ex Australia Index from the base date of ESPO Index which is 31 December 2014.
ESPO Index performance prior to its launch on 14 August 2020 is simulated based on the current index methodology. Past performance is not a reliable indicator of future performance. You cannot invest directly in an index. Returns in ESPO’s Index are calculated daily and assume immediate reinvestment of dividends, and are net of ESPO’s management fees but do not include brokerage costs or buy/sell spreads of investing in ESPO.
ESPO is an Australian first. It offers investors the unique opportunity to invest in the largest pure-play video gaming and eSports companies in the world. ESPO tracks the MVIS Global Video Gaming & eSports Index which includes companies which generate at least 50% of their revenues from video gaming and/or eSports.
When compared against the NASDAQ 100, ESPO exhibits favourable historical Earnings per Share (EPS) and Sales Growth. as well as notably cheaper valuations. The fund’s Price/Earnings (P/E) ratio is about 31 times, which is lower than the NASDAQ’s 38 times. It also has a lower Price to Book (P/B).
When we compare the Top 10 holdings of ESPO to the FAANGs’ you can see the stretched valuations of these mega caps.
Summary - Key points about ESPO:
Technology diversification away from mega cap FAANGMs
Take advantage of booming growth in the industry, which is forecast to generate over US$300bn in revenue by 20253.
Easy, one-trade access to a global equity portfolio of companies operating in the video gaming and eSports industry.
Companies must derive at least 50% of total revenues from video gaming and/or eSports to be initially eligible for the index.
Exposure to leading video gaming and eSport companies including publishers Tencent, Nintendo, Electronic Arts and Activision