With prize money in the multi-millions and overall spending in the multi-billions, investors are eager to play the explosive growth in competitive gaming known as e-sports.
But betting on one e-sports company can be risky – a reality exchange-traded fund (ETF) providers are looking to capitalize on with products that include a wide range of players in the electronic gaming world, also known as e-gaming.
An example is the Evolve E-Gaming Index ETF (HERO), Canada’s first and only e-sports ETF launched in June by Evolve Funds Group Inc., which gives investors access to a global portfolio of the largest video game makers such as Activision Blizzard Inc., maker of the popular Call of Duty video game, and Electronic Arts Inc., the firm behind Madden NFL.
Some of the largest e-sports ETFs on the market today include the ETFMG Video Game Tech ETF (GAMR) and the VanEck Vectors Video Gaming & eSports ETF (ESPO), both listed on the New York Stock Exchange and providing global exposure to the video gaming industry.
These offerings aim to build on the e-sports industry’s recent market performance as illustrated by MVIS Global Video Gaming and eSports Index (MVESPO). The index, launched last year, provides the collective performance of its holdings dating back to late 2014, which shows a total return exceeding 225 per cent.
The competitive gaming industry is expected to generate US$152-billion in revenue this year alone, according to research firm Newzoo, an increase of 9.6 per cent versus 2018. Newzoo also forecasts consumers will spend about US$196-billion by 2022, with China driving the growth after recently surpassing the U.S. as e-gaming’s largest market.
Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial Inc., describes the e-sports industry’s expansion as “eye-popping” and “a very interesting niche of technology.”
ETFs offer a diversified way to invest in the niche sector without making “big bets” on any one company, Mr. Straus says. But investors are also concerned about whether the growth is sustainable.
“There is quite a bit of bubbling activity within Japanese and U.S. companies in this segment,” Mr. Straus says.
Despite the rapid rise of the relatively-nascent industry, e-sports ETFs are still small by market-capitalization and trading volume, two qualities Mr. Straus says are often associated with hot investments at risk of suddenly going cold
What’s more, it remains to be seen how emerging technologies, such as augmented reality and virtual reality, will impact the gaming industry’s future expansion.
Evolve chief executive officer Raj Lala acknowledges being skeptical at first about the expansion in e-sports.
“Originally, my thought was, ‘Yes, it’s interesting but is there enough scope for an ETF dedicated to this area?’” Mr. Lala says. But he found the new industry model compelling, driven by in-game purchases and advertising.
It’s a shift away from PC and console-based gaming to one driven by mobile apps. “Ten years ago, you bought the disc and that’s where the revenue would stop for the gaming manufacturer," Mr. Lala says. “In today’s world, a lot of games are downloaded for free online.”
That’s where the revenue generation really takes off. Mr. Lala says it’s how the two most popular games on the market today, Fortnite (partly owned by Chinese video game maker Tencent Holdings Ltd.) and Minecraft (owned by Microsoft Corp.), are driving revenues.
He also sees “an entire ecosystem” of profitability around these games. “A lot of these gaming companies ... also create the leagues people will compete in, and in addition to that, they create the events a lot of people will compete in, which lots of people will view.”
These competitive leagues now rival the traditional world of competitive sports, says Wim Stocks, general manager of the WorldGaming Network, a subsidiary of Cineplex Inc.
“Competitive video gaming is only half of it,” Mr. Stocks says. “The other half [is] the hundreds of millions of people watching.”
E-sports competitions now fill arenas, including the recent Fortnite World Cup in New York that saw 16-year-old American Kyle Giersdorf win US$3-million at Arthur Ashe Stadium. That’s the same venue where Canadian tennis star Bianca Andreescu won US$3.85-million as U.S. Open champion.
Big tech companies are also developing online ecosystems for e-sports, further professionalizing it. Chief among these are Twitch, a live-streaming video platform owned by Amazon.com Inc.
Investors can get indirect exposure to e-sports through broad-based ETFs that hold companies such as Facebook, Apple, Amazon, Google and Microsoft. Those seeking pure exposure may want to consider ETFs such as HERO, ESPO, GAMR or the Roundhill Bitkraft eSports & Digital Entertainment ETF (NERD).
Mr. Straus cautions e-sports investors are likely to experience a “boom-bust” ride toward profitability. For example, many ETFs are highly concentrated among a few big game-makers and a lot of small, fledgling firms, which can make them volatile.
“That’s why we’d never advise a client to take on more than a few percentage points of weighting for these in a portfolio,” Mr. Straus says.
Still, given the forecasts for the future of this industry, Mr. Straus sees why many investors – including those with active gamers in the family – may find the sector appealing.
“There are good reasons to believe the growth prospects and future entrenchment of e-gaming are real.”