Getting in the Game with a High-Flying Video Game ETF

An array of high-growth industries are making lemonade out of the lemons delivered by the coronavirus pandemic. Supported by shelter-in-place directives enforced earlier this year, video game equities and the related exchange traded funds are among this year's best-performing assets.

The VanEck Vectors Video Gaming and eSports ETF (ESPO) is a prime example of video game ETF bullishness in 2020. Not only is ESPO beating the S&P 500 by a margin of more than six-to-one on a year-to-date basis, but there are some other compelling data points underscoring the viability of the video game investment thesis.

Although video game equities are mostly considered growth stocks – nearly all of ESPO's holdings hail from the communication services and technology sectors – the group is actually proving less volatile than the broader market. Year-to-date, ESPO's annualized volatility is 400 basis points below the S&P 500's, according to ETF Replay data.

Additionally, ESPO's maximum drawdown this year is 21.8 percent. Rough, but it also pales in comparison to the 33.8 percent drawdown suffered by the S&P 500. Said another way, video game investing is proving surprisingly safe this year.

Pre- and Post-Pandemic Growth

Like many of the themes getting a boost from the pandemic, esports and video games were on impressive growth trajectories prior to COVID-19 becoming part of the everyday lexicon. That speaks to the long-term viability of this investment thesis.

Focusing on the here and now, the broader video game industry is projected to generated $159 billion in sales this year, more than both cybersecurity and robotics.

“By 2023, over 3 billion people around the world are expected to play video games in some form,” according to VanEck research. “The video game industry represents a long-term structural growth industry, supported by broader trends including demographic shifts and cord-cutting.”

ESPO is underpinned by favorable demographic trends as well. When video games burst onto the scene in 1980s with the Atari 2600 console and, later, the Nintendo Entertainment System, gaming was viewed as something for kids that they eventually grew out of. In the 1990s, as consoles became more sophisticated thanks to the arrival of the original PlayStation, the audience expanded, but was still mostly capped at college-age males.

That script is being flipped. As VanEck points out, nearly two-thirds of American adults play video games and many millennials are willing to devote financial resources to this hobby.

New Frontiers

Traditionally, gaming is associated with consoles such as the aforementioned PlayStation, Nintendo hardware and Microsoft's (MSFT) Xbox or computer games, which are important contributors to the growth of the esports category.

However, gaming is forging new frontiers helped increasingly sophisticated technologies, such as 5G and cloud computing that are providing foundations for epic mobile gaming growth.

“Mobile gaming represents both the largest platform by revenues and the fastest growing one,” notes VanEck. “Since 2015, mobile revenues have grown at an annualized rate of 22%, outpacing the total gaming revenues growth rate of 15%.”

Of consoles, PC gaming and mobile, mobile is by far the fastest-growing segment in the gaming space. It's a vital revenue diversifier for game publishers because it lends itself to higher levels of in app purchases and subscription-based models, which increase revenue visibility.

Bottom line: the gaming industry has multiple growth levers to pull and will remain relevant long after COVID-19 is vanquished, indicating ESPO's 2020 performance is likely more floor than ceiling.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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