As global lockdowns fueled demand for in-home entertainment, exchange-traded funds that focus on videogames reaped the rewards. This could accelerate longer-term trends, though there may be pitfalls ahead.
Four major gaming-focused funds have gains ranging from 19% to 28% this year. Neena Mishra, director of ETF research at Zacks Investment Research, says all forms of gaming—from consoles to streaming to mobile—have benefited at a time that sporting events and other forms of entertainment have been canceled or postponed.
However, while such strong performances are noteworthy during a time of economic turmoil, the funds were largely “doing well even before Covid-related shutdowns,” she says.
This is because videogames have benefited from three broader trends, says JP Lee, a product manager at VanEck, which operates VanEck Vectors Video Gaming & eSports ETF (ESPO), a $241 million fund that is up 27%. First, Mr. Lee points to consumer demand for interactive entertainment. Second, there has been a move away from more expensive, traditional media to cheaper alternatives, like streaming television or videogames. Third is the clout of younger consumers, who have increasing buying power, are more enthusiastic about videogames and embrace the first two trends more than older generations.
“Videogames sit right in the middle of those three pillars,” Mr. Lee says.
The sector’s growth, meanwhile, isn’t just being driven by consumers playing games. Another theme is increasing interest in watching other people play. This was highlighted recently by the eNascar iRacing Pro Invitational Series, with Nascar drivers competing in simulated races.
This business was already doing well before Covid-19, says Will Hershey, chief executive of Roundhill Investments, the firm behind Roundhill Bitkraft Esports & Digital Entertainment ETF (NERD). But the business has received a significant boost from “live, traditional sports being put on hold,” Mr. Hershey adds. The $18 million NERD is up 19%.
The videogame industry could continue to thrive after the pandemic is over, says Jay Jacobs, head of research and strategy at Global X, which manages Global X Video Games & Esports ETF (HERO), a $90 million fund up 28%. Mr. Jacobs says the pandemic could have a long-term impact on the sector, bringing in new gamers or esports viewers who could stick around when life returns to normal.
Michael Pachter, managing director of equity research and videogames analyst at Wedbush Securities, estimates that the pandemic has lifted the number of gamers 10% world-wide, and expects that at least half of these new gamers “are probably going to stay and continue playing moving forward,” with particular potential in the streaming sector. Wedbush partners with ETF Managers Group on Wedbush ETFMG Video Game Tech ETF (GAMR), a $91 million fund up 20%.
However, there could be tough times ahead, says Ms. Mishra. Sports fans are likely to return to physical sports when those restart, for example. And if the lockdowns lead to a major recession, she says, “consumers could limit their expenditure on nonessential items—like videogames.”
The videogame business is in a sweet spot, and ETFs that invest it in are reaping the benefits.