Gaming ETFs: Big CEOs Are Interested in This Space, Are You?

Bob Iger is interested in this space. Satya Nadella is interested in this space. Are you? Here are some ETFs highlighting the growing trend in the gaming industry from The Finance Ghost.

There’s an ETF for that
The availability of exchange traded funds (ETFs) in the US is wonderful. As Nerina Visser once said to me on a Magic Markets podcast: “There’s an ETF for that!”

Nerina is right, of course, which is no surprise given her expertise in the area. If there’s a theme that you are interested in accessing on the markets, then it’s entirely plausible that there’s a juicy ETF that captures the key drivers of that theme by buying a basket of stocks with exposure to it. Of course, you have to dig carefully into the details of each ETF before picking one.

Perhaps saying “picking one” is also wrong. There’s nothing wrong with spreading your risk even further by choosing a couple of different ETFs along the same theme. If one has too much exposure to a specific company or region for your tastes and a competing ETF has too little, then a blend of the two can get you to where you want to be.

Think of ETFs as the building blocks of your portfolio; the little pieces of Lego that make something beautiful.

All work and no play… you know the rest
We love to play. Anyone who has had a little human will know that kids find any excuse to turn something into a game, letting their imaginations run wild. The gaming industry gives those creative juices an outlet by creating fascinating worlds filled with strategies, tasks and new experiences. Although I have no real interest in gaming as an adult, I have endless excellent memories of gaming as a kid.

This trend isn’t going away, either. In fact, it seems to be speeding up among younger generations who are living increasingly digital and virtual lives. In a recent discussion at the Morgan Stanley Technology, Media and Telecom Conference, Disney CEO Bob Iger commented that demographic trends show that Gen Z and Gen Alpha are spending just as much time playing games as they are on movies and television, coming in at around 30% of their screen time.

This statistic spurred Iger into action, driving Disney to enter into a fascinating transaction with Epic Games. The highlights reel of the deal is that Epic Games will build an entertainment universe connected to Fortnite that is obviously brimming with Disney characters and intellectual property. In turn, Disney will invest $1.5 billion for an equity stake in Epic Games. Although Disney says that the development of the universe is at Epic Games’ expense, we can safely conclude that it will be funded by the equity injection. Still, this gives Disney a very clever position in gaming that goes way beyond their historical participation, which has been limited to licensing of intellectual property like Spider-Man to game developers.

Disney certainly isn’t the only recent example of significant acquisitive activity in this sector. The word “Activision” features no fewer than 23 times in Microsoft’s Q2 2024 earnings call transcript. The acquisition of Activision Blizzard was completed in that quarter. Microsoft now has hundreds of millions of gamers in its ecosystem, which creates a part of the business that is distinct from Microsoft’s core strength in enterprise software and cloud solutions. Another important angle here is that Microsoft has never been fantastic at the hardware side of things. With this deal, they move from being focused on Xbox to having a substantial business that is platform agnostic. It’s a solid strategic play.

Bob Iger is interested in this space. Satya Nadella is interested in this space. Are you?

You don’t have to pick a stock here
Stock picking is a lot of work. You have to research an entire sector, looking at how all the different companies operate and which ones seem to be relatively stronger than others. Then you need to layer on the valuations and watch your positions closely, as single-stock fundamentals can change quickly.

If you’re looking for a less stressful way to play this theme (thereby freeing up more time for gaming or whatever else you enjoy doing), there are a few ETFs to consider. They have rather clever stock tickers that make them easier to remember.

The four in question are the VanEck Video Gaming and eSports ETF ($ESPO), the Global X Video Games & eSports ETF ($HERO), the Roundhill Video Games ETF ($NERD) and the Amplify Video Game Tech ETF ($GAMR).

 Although these ETFs are focusing on essentially the same underlying sector, differences in geographical exposure and other elements have caused quite the divergence in performance:

Remember, these are dollar-based returns. Over five years, VanEck has delivered solid returns, but is still way behind the Nasdaq-100. Global X and Amplify are at least not embarrassing if not exciting, while the Roundhill ETF has been a major disappointment.

Were you better off just buying the Nasdaq? Over this period, which saw an explosion in cloud computing and the emergence of mainstream Artificial Intelligence, absolutely. Will that be the case over the next five years? Not necessarily. It really depends on your views on gaming.

Or does it?

How to tell ETFs apart
To figure out why the performance can be so different across ETFs, we need to dig into the fact sheets and look at the relative exposures. We begin with VanEck, which tracks the MVIS Global Video Gaming and eSports Index. In practice, here’s what that means based on the latest fact sheet:

Further on in the fact sheet, the country exposure is noted as 35% United States, 24% Japan and 18% China.

Rather than commenting on this in detail, let’s move to the other side of the performance spectrum and look at the Amplify ETF, which tracks the EEFund Video Game Tech Index:

As you can see, the top ten exposure here looks incredibly different to VanEck. For a start, Tencent doesn’t feature, which means this ETF is missing a pretty important exposure. AMD is also nowhere to be found in the top ten, so it missed the chip boom there.

Here’s the funny thing though: if you think about it, VanEck has done particularly well because top exposures have included companies that play far beyond gaming. Tencent is the technology giant of China, with gaming as only one part of the story. AMD has benefitted from various sources of demand for chips. Amplify has tried to deliver a more pure-play exposure to gaming, which ironically has led to underperformance.

Like I cryptically hinted earlier, perhaps you don’t need to believe fully in gaming to take a view on VanEck’s likely future performance vs. the Nasdaq-100.

Moving on, here’s the Global X ETF that tracks the Solactive Video Games and eSports Index:

Interestingly, this one is roughly equally weighted across the US and Japan, with 28% exposure to both. South Korea is next at 14%.

Finally, the Roundhill Investments ETF, which tracks the Nasdaq CTA Global Video Games Software Index, has these top holdings:

Here, we find the only ETF in the group that has Japan as its largest exposure (39.5%), followed by the United States at 31.6%.

Not so passive after all, are they?

The description of ETFs as passive investments isn’t fully accurate. If you think about, even the decision to buy a vanilla ETF (like an S&P 500 feeder fund) is an active decision, as you need a view on the rand and on the underlying index. The product may be passive but the decision is not.

For these thematic ETFs, there are two layers of active decisions. First, you have to decide if you want global exposure and if you want to hold gaming in general. Then, you have to consider the active decisions that were made in the indices tracked by the ETFs. The creation of custom indices in the US market and proliferation of ETFs is something I’m quite jealous of. They have the liquidity in that market to do it.

As you build out your portfolio strategy, be sure to include ETFs. They really are powerful. Also be sure to research them properly, particularly as you look at more thematic ETFs. They are just as interesting as single stocks.

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