Which of These Gaming ETFs Can Take Your Portfolio to the Next Level?

Video games are still regarded by some holdouts as the latest stuff that will rot your brain. Yet, from the days of quarter-fed Pac-Man and Galaga machines to today's 45,000-seat sell-out finals events, video gaming has over recent decades transformed into a rapidly growing segment of consumer discretionary spending. They are a global phenomenon and the source of lucrative contracts for top teams and players. And, now, eSports, the next evolution of video games, is taking gaming from tight-knit amateur squads lighting up leader boards to well-paid, sponsored teams dominating the global stage. Let's take a look at two exchange-traded funds that provide investors exposure to this emerging space. Let's Go, ESPO The Van Eck Video Gaming and eSports ETF was launched in October 2018 and tracks the MVIS Global Gaming & eSports Index. The fund has a 55-basis point expense ratio meaning that a shareholder with $1,000 invested for a calendar year would expect to pay fees of $5.50 over that holding period. The index tracks companies that are involved in video game development, hardware including CPUs (Central Processing Units) and GPUs (Graphics Processing Units), and accessories like controllers, headsets, and consoles. Also eligible are companies involved in providing streaming services, eSports event participants such as league operators, teams, distributors, and platforms. The methodology doesn't specify a base universe or selection criteria beyond requiring a minimum market capitalization of $150 million, $1 million average daily trading volume, and 250,000 shares traded per month over the past six months. Names also must meet the 250,000 shares traded criterion over the previous two reviews as well. Positions are capped at 8% and companies have to generate at least 50% revenues from video gaming and eSports. There is no stated limit or target of names in the index and the fund currently has 25 holdings. One thing that caught my eye when reviewing the fund was that Van Eck is active in the security lending space and reading through the fund's latest annual report, I calculated that 4.44% of the fund's income was attributable to securities lending. Be a HERO The 50-basis point Global X Video Games & Esports ETF was launched October 2019 and tracks the Solactive Video Games & Esports Index. The fund seeks to invest in companies that develop or publish video games, facilitate the streaming and distribution of video gaming or eSports content, own and operate within competitive eSports leagues, or produce hardware used in video games and eSports, including augmented and virtual reality. The selection process begins with a broad universe of developed market (including South Korea and Taiwan) equities with a minimum $200 million market capitalization and $2 million worth of shares traded on an average daily basis. For existing index names, these thresholds are set a $160 and $1.4 million, respectively. These kinds of carve-outs are referred to as buffer rules and help keep the strategy exposed to relevant names as well as help keep portfolio turnover and transaction costs down. Once the broader universe is set the index provider employs what it describes as a natural language processing algorithm to sort through websites, company filings, and the like to determine an index score based on an eSports keyword list. Any companies not publishing items in English are crossed against Factset's Revere Business Industry Classification System Games Software segment and results are added to the overall pool. Once the eSports universe has been developed the list filters out any company that has less than 50% revenue exposure to the strategy. Positions are market-capitalization-weighted with a 6% position cap and a 0.30% minimum position size. Diversification rules are also in place to ensure that the aggregate weight of positions greater than 5% does not exceed 40%. The index has at least 40 constituents and is capped at 50 names. Similar to Van Eck, Global X is also active in the security lending space, and reading through the fund's latest annual report, I calculated that 3.38% of the fund's income was attributable to securities lending. Test Your Might - FIGHT! With apologies to the Mortal Kombat franchise, let's see how these funds stack up against each other. As you can see in the below chart showing performance from the launch of HERO on Oct. 19, 2019, to Tuesday, both these funds track each other fairly well, with ESPO leading in some periods and HERO outperforming in others. For reference, I have added the SPDR S&P 500 Trust ETF SPY and the Consumer Discretionary Select Sector SPDR Fund to the chart. Over the observed period, ESPO has returned an annualized 22.41% as compared to 21.02% for HERO, 13.72% for XLY, and 14.38% for SPY. What stands out to me is how much the video game and eSports theme has outperformed both consumer discretionary names as well as the overall market. Year-to-date, by Tuesday ESPO is down 17.33% and HERO is off 16.72%, down more than SPY off 12.36% but doing better than XLY, which is down 20.01% over the period. ESPO shows a 73% holding overlap with HERO (73% of ESPO names are in HERO) with Advanced Micro Devices , Nvidia , Micro-Star International (2377-TW), and Tencent Holdings (700-HK, TCEHY) making up some of that difference. HERO, on the other hand, has a 38% holding overlap with ESPO with names like headset maker Turtle Beach and accessory manufacturer Razer (1337-HK, ). As an aside, a computer enthusiast accessory manufacturer and lifestyle brand having the leetspeak ticker 1337? Old school marketing genius right there, at least for pre-emoji dinosaurs like me. What I also see more of in HERO that seems to be absent from ESPO is exposure to a lot more developers. While these names may be smaller, they represent future growth and M&A potential that I feel ESPO may miss out on. Looking at some year-to-date performance attribution both funds share the same Top 5 contributors to return in the same order and share six of the same names (in no particular order) in the Top 10 detractors to performance between the end of last year and Tuesday of this week. In terms of which fund I think best represents the video gaming and eSports industry, it's a tight call. But the inclusion of names like TCEHY, AMD, and NVDA in ESPO and the broader representation of game developers in HERO, as well as the relative outperformance year-to-date, tip my hand to Global X.

Which of These Gaming ETFs Can Take Your Portfolio to the Next Level?

Let's compare two eSports exchange-traded funds to see the one that scores the highest.

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