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Inside the Market How investors can profit from all those jobless young males playing video games

Investors can determine whether social concerns prohibit investment in this sector.

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As an investment theme, video games have been remarkably successful investments even if there are ways they remind me of tobacco stocks. Cigarette companies are worse, of course – their products kill people and give them strokes while video games are merely correlated with immobility-inspired obesity and distinctly anti-social worldviews. Still, these are not tendencies most investors are willing to promote with their portfolio assets.

The performance of video-game stocks, however, makes it tempting to ignore these ethical quibbles. (Uncomfortably, it's also a related fact that, according to Credit Suisse research, tobacco stocks have been the top performing market sector of the past century, turning $1 in 1900 into $6.3-million by 2010).

The easiest and most diversified way to invest in video-game stocks is the U.S.-traded ETFMG Video Game Tech ETF (exchange-traded fund). The first chart below shows that a $10,000 (U.S.) investment in the ETF at inception in March, 2016, would have generated an 80-per-cent cumulative return so far, almost triple the return from the S&P 500.

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To get a longer-term perspective on sector performance, I calculated the five-year investment returns on the five largest positions in the video-game ETF where data was available. One of the stocks that had to be omitted was Nintendo Co. Ltd., the seventh-biggest ETF holding. This exemption was unfortunate in that, after a table-pounding recommendation from Citi research, Nintendo's U.S.-traded stock has jumped 85 per cent since the end of February, 2017.

Where performance data were available, the results were frequently impressive. A $10,000 investment in Take Two Interactive Software in 2012, for example, would now be worth about $98,000. A similar investment in French game developer Ubisoft Entertainment SA also increased by more than nine times in the past five years.

Already growing quickly, the video-game industry is set to benefit from the development of virtual reality (VR) technology. Citi Research notes that three game systems incorporating virtual reality were released in 2016 and the technology "is now firmly on the radar as an investment theme. … The opportunity is material, real and set to accelerate."

Citi expects the virtual reality and less sophisticated "augmented reality" markets to grow to $80-billion by 2020 and $560-billion by 2025. The analysts predict chip maker Nvidia Corp. and Asian technology equipment maker GoerTek Inc. to be among the main beneficiaries of virtual-reality proliferation.

One of the primary drivers of growth for video-game stocks is the rising prevalence of gaming as almost a substitute for real life. The Economist's Ryan Avent details research noted that the employment rate for young U.S. males dropped 10 percentage points from 2000 to 2015 and "of the [resulting] rise in leisure time, 75 per cent was accounted for by video games."

Video games are not chemically addictive like cigarettes, but the startling statistics in Mr. Avent's work suggest that the highly immersive, often violent experience of video games are psychologically tempting to the point where many young males are willing to delay their careers, and sacrifice social activities in the real world.

But the ability of video games to provide engrossing escapism is also a big reason gaming stocks as an investment theme holds so much promise. The attraction will only increase as virtual-reality games are perfected.

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Investors can determine whether social concerns prohibit investment in the video-game theme, but the fact remains that the industry is big, getting bigger quickly, highly profitable and likely to stay that way.

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