No Quarantine Conundrum for this High-Flying Video Game ETF

With much of the U.S. economy reopen or on its way to that status, some market participants may be quick to forget the various investment implications of the novel coronavirus.

The shouldn't be. As broader market price action on June 11 and 12 confirms, COVID-19 remains an issue for riskier assets. In fact, the idea of a second wave of coronavirus isn't far flung. Data confirm that many of the states that either didn't shutdown or were quick to reopen are experiencing material upticks in case counts. Things are shifting so dramatically in Houston that officials in the fourth-largest U.S. city are considering renewing stay-at-home directives.

As a quick refresher, some of the premier investment themes against the COVID-19 backdrop are e-commerce (folks still need to eat and procure other essential items) and cloud computing, which is getting a major boost from increased work from home policies. 

Then there's entertainment. More people staying at home has been a boon for the likes of Netflix (NFLX). On that note, there's no denying some of the folks staying at home are turning to video games for entertainment. Up 26.15 percent year-to-date, the VanEck Vectors Video Gaming and eSports ETF (ESPO) confirms the benefits of quarantine for video game investments.

ESPO Excellence in a Challenging Environment

ESPO turns two years old in October and follows the MVIS Global Video Gaming and eSports Index, “which is intended to track the overall performance of companies involved in video game development, esports, and related hardware and software,” according to VanEck.

ESPO is up 39 percent in the second quarter, but there are other data points confirming the validity of the gaming investment thesis in the coronavirus climate.

“According to our survey results, a third of Americans have increased their time playing video games since quarantining,” notes Satellite Internet. “But with more people online, you may need faster internet to keep up with the competition: 39% of online gamers have experienced increased buffering during the quarantine.”

Boding well for the long-term trajectory of ESPO is that gamers have similar to habits as those displayed by aficionados of other forms of entertainment. During the quarantine, chances are you've heard from a friend or family member that's binge-watched a TV series or movies on a platform like Netflix. Well, gamers exhibit comparable behavior.

“Thirty percent of socially isolating gamers play video games for two to three hours a day. And nearly 23% of all our gaming survey respondents played four hours or more every day,” notes Satellite Internet.

A prime example of gamer enthusiasm increasing during the quarantine is the Nintendo Switch and the Animal Crossing: New Horizons title played on that mobile console. When that title was released a couple of months ago, Switches sold out. That's an anecdote, but one relevant to ESPO investors because Nintendo is a top 10 holding in the ETF at 5.55 percent of its weight.

Looking Beyond The Virus

At some point, treatments and vaccines for COVID-19 will hit the market and case numbers and fatalities will decline from the levels seen over the past months. Life will get back to some semblance of normal and shelter-in-place policies will be a thing of the past.

That doesn't erode the ESPO/video game investment thesis.

One catalyst investors can look to later this year is the hardware upgrade cycle, meaning the debuts of the PlayStation 5 and the new Xbox in advance of the holiday shopping season. Neither Sony (SNE) nor Microsoft (MSFT) are members of ESPO's roster, but the ETF is levered to the hardware upgrade because Nvidia (NVDA) and Advanced Micro Devices (AMD) – makers of chips for the new consoles – combine for over 15 percent of the fund's weight.

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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