The global video games industry is bigger than ever. Tom Bailey looks at the ETFs that give exposure to the theme.
Video gaming is a big business. According to figures from Statista, in 2020 worldwide PC gaming revenues totalled almost $37 billion (£26 billion). Meanwhile, the mobile gaming market generated an estimated revenue of more than $77 billion.
The industry is also undergoing some major shifts. The sector is increasingly moving from a model of one-time transactions, whereby a customer pays once for a game in the form of a physical product, to a service-based industry where consumers pay for seasonal content, expansion add-ons and other in-game purchases.
According to Briegel Leitao, an associate analyst focused on passive strategies at Morningstar, this shift is proving to be highly profitable. He notes that consumers are generally happy to pay for new content on an ongoing basis, viewing it as a way to show continued support for development teams.
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On top of that has been the highly profitable rise of the e-sports industry, whereby hundreds of thousands of fans watch professional players compete in high-stakes, well-organised tournaments. Revenue mainly comes from sponsorships, merchandising and advertisement.
For investors trying to gain exposure to this sector, there are two ETFs to consider: the VanEck Video Gaming & Esports (LSE:ESPO) and Global X Video Games & Esports (HERU). The VanEck ETF tracks the MVIS Global Video Gaming eSports index, composed of 25 stocks, for 0.55%. The Global X ETF tracks the Solactive Video Games & Esports V2 Index, composed of 40 stocks, for 0.5%.
So, which one should investors go for? On the surface, the Global X ETF does appear slightly more attractive. Both ETFs have a relatively small number of holdings, however, Global X is slightly less concentrated, with 40 holdings. This means it has less single-stock risk than the VanEck ETF. However, in the grand scheme of things both are relatively concentrated portfolios. Global X also charges slightly less, albeit only by five basis points.
In terms of the sorts of companies they hold, Leitao says they are both fairly similar. He notes that the bulk of companies in both ETFs are intellectual property-centric with asset-light balance sheets, with hardware manufacturers making up relatively little of their allocations.
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However, that’s not to say there is no difference in this regard, says David Stevenson, executive editor of ETF Stream, who also blogs at Adventurous Investor. He notes: “Take the exposure to hardware, especially chip companies such as Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD). For VanEck, those two are 13.65%, whereas for Global X it is just under 5%. So that’s a key difference.”
Leitao also points out another difference. He says that the VanEck ETF is positioned slightly more in favour of developer studios and the Global X ETF tilted towards streaming platforms.
In terms of geographical allocation, both have a relatively high exposure to Asia. As Leitao notes: “While the consumer base is global, many of these content creators are still Asian-based companies. Accordingly, it makes sense to see that both portfolios allocate around 60% to the Asia region, with major hotspots for these themes being China, Japan, and South Korea.”
Stevenson also points out that the VanEck ETF has a large exposure to Chinese tech giant Tencent (SEHK:700), at 8.6%. He says that this is either an advantage or a disadvantage depending on your point of view. He concludes: “My point is that there is no good or bad here. If you want more mega-large cap, China large-cap and tech hardware exposure in a smaller, less diversified portfolio, then it’s VanEck. If you want more diversification, less hardware exposure and arguably a bit more small-cap exposure, then Global X may be better.”
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