SPECIAL TO THE GLOBE AND MAIL
PUBLISHED JUNE 11, 2020
With the COVID-19 pandemic leaving people stuck at home with no professional sports to watch, even some more staid pursuits such as chess, sudoku and crosswords have become hyped-up online spectator events.
The surge in demand for these and other online games to escape reality and fill time has supercharged the electronic-gaming sector. Niche exchange-traded funds (ETFs) that include game developers, publishers and hardware-sellers – as well as the burgeoning e-sports sector that features tournaments with professional gamers – are experiencing a surge of inflows and strong returns so far this year.
“The lockdown has been good for video-gaming companies,” says Lara Crigger, senior staff writer at ETF.com in New Orleans, saying that some e-games ETFs have seen more than half of their total flows come over the past few months.
U.S.-based e-gaming ETFs that have performed particularly well in the pandemic hold a blend of traditional game makers as well as online and e-sports, Ms. Crigger says. These include the VanEck Vectors Video Gaming & eSports ETF (ESPO-Q), which has returned more than 25 per cent year-to-date and the Global X Video Games & Esports ETF (HERO-Q), which is up by about 28 per cent so far this year. (All data from Morningstar as of June 8.)
The fact that e-sports events can’t be held in stadiums and arenas right now, and have moved online, removes extra revenues for some operators, Ms. Crigger says.
It’s why the Roundhill Bitkraft eSports & Digital Entertainment ETF (NERD-A), a small pure eplay fund with AUM of about US$18-million, has seen a lower year-to-date return of 20 per cent, compared with its peers, and more modest inflows.
Meanwhile the oldest e-gaming fund, the Wedbush ETFMG Video Game Tech ETF (GAMR-A), has seen a small decline in flows, Ms. Crigger says. GAMR holds a more diverse gaming portfolio, including consumer discretionary companies and bricks-andmortar retailers, which have been bruised in the current stayat-home environment. Still, GAMR, with an AUM of about US$90-million, has returned about 20 per cent year-to-date.
The Evolve E-Gaming Index ETF (HERO-T), Canada’s first and only ETF in the sector, has an AUM of $11.6-million and returned 21 per cent year-to-date.
“People need to find things that they themselves can do and their kids can do,” says Raj Lala, chief executive of Evolve Funds Group Inc. in Toronto, saying that video games are attracting diverse age groups and appealing increasingly to women. He says e-gaming offers social interaction at a distance and a fix for sports junkies missing their basketball and hockey championships and baseball spring training.
“[E-gaming] has really taken on its own life,” Mr. Lala says, citing data showing that about 13 per cent of YouTube’s viewership today is devoted to gaming.
Average daily playtime for “shooter-type” high-action video games grew to 60 minutes in March from 38 minutes in December, according to the research firm Newzoo.
It says mobile gaming has seen the biggest increase in engagement and revenues as a result of the COVID-19 lockdown measures, and forecasts that the world’s 2.7 billion gamers will spend US$159-billion on games in 2020, with the market surpassing US$200-billion by 2023.
Mr. Lala expects some online gaming action to be offset by live professional sports when it eventually returns.
However, he says that e-gaming manufacturers are constantly releasing higher-quality products that have richer graphics and bring ancillary revenues from advertisers and add-on fees. The sector also has “recession resilience,” Mr. Lala says, with users seeing gaming as an economical entertainment option in troubling times expected ahead.
“A lot of investors are becoming savvy now, they’re realizing that the world is going to be different and they’re looking for ways to participate in some of those changes,” Mr. Lala says.
David Kletz, vice-president and portfolio manager at Forstrong Global Asset Management Inc. in Toronto, says that with new online releases, multipleplatform access and extra revenue-drivers such as in-app purchases, the gaming industry is becoming more robust and “investable” than in the old days of consoles and games on CD.
“It’s definitely a much more resilient business model,” Mr. Kletz says. “It’s an interesting transition.”
He says that the development of subscription-based games, akin to a “Netflix for gaming,” are a growing source of revenue for major names such as Apple Inc., Microsoft Corp. and Alphabet Inc.’s Google. “I don’t even need to leave my house; all I need is my internet connection and off we go.”
E-sports currently represent a fraction of the industry but have an opportunity for “massive scale,” Mr. Kletz says. “The number of people that tune into this stuff is insane.”
The industry is looking to further monetize that phenomenon, which is critical from an investment standpoint. “There’s a lot of untapped potential there,” Mr. Kletz adds.
Ms. Crigger agrees that “esports is the future of gaming,” and even with the end of the pandemic, the largest growth in gaming will be in offering such activities online.
“They’re ridiculously lucrative,” she says. “People are attracted to the idea that we’re all stuck at home now, so let’s try and play that trend.”
Still, she cautions that, while gaming is a “cool theme,” investors in these ETFs run the risk of doubling up on their exposure to technology names and to the Asia-Pacific region.
“You have to make sure you’re not just backing a story; you’re backing an exposure that is distinct and unique and actually diversifying your portfolio,” Ms. Crigger says.
“And make sure it isn’t something you already hold in a different wrapper.”