ESPO Quietly Back To A Near 3-Year High

The VanEck Video Gaming and eSports ETF (NASDAQ:ESPO) offers targeted exposure to the leading companies involved with video game development, electronic sports, as well as related software and hardware.

This market segment captured a wave of momentum during the pandemic, as consumers staying at home drove record video game sales nearly four years ago. That was the theme we highlighted when we last covered ESPO in 2020 ahead of the extreme selloff through 2022 that worked to reset industry valuations.

Fast-forward, a steady rally over the past year has lifted the ETF back to near a 3-year-high. The sense is that an ongoing industry recovery supports a positive long-term outlook for the fund. Does that make the ESPO a compelling buying opportunity right now? Here’s what you need to know.

What is the ESPO ETF?

ESPO is intended to passively track the “MVIS Global Video Gaming and eSports Index” covering companies that generate at least 50% of their revenue from video gaming and or esports for inclusion.

Notably, the index and ESPO ETF feature a modified market-capitalization weighting methodology capped at 8% for any individual stock following a semi-annual reconstitution and quarterly rebalancing.

Going through the current portfolio of just 28 stocks, what stands out is the fund’s global profile, where nearly two-thirds of the companies are foreign names. The understanding is that video games represent a worldwide market and the various key players are commercializing across borders.

China’s Tencent Holding Ltd. (OTCPK:TCEHY) is the current largest investment with a 10% weighting. While that level is technically above the capped threshold, gaining importance based on its 30% return thus far this year, the understanding that the position will be reduced at the next rebalancing.

Nintendo Co., Ltd. (OTCPK:NTDOY) together with processing chips and graphics card leader Advanced Micro Devices (AMD) both have a 6% weighting. Down the list, we find a good balance between large-cap platform publishers like Electronic Arts (EA) and Take-Two Interactive Software (TTWO) along with smaller mobile-focus developers like Aristocrat Leisure Ltd. (OTCPK:ARLUF).

Other notable names include Sea Ltd. (SE), AppLovin Corp. (APP), Roblox Corp. (RBLX), and Ubisoft Entertainment (OTCPK:UBSFY).

ESPO Performance

ESPO isn’t the only “video game” ETF available for investors, with alternatives like the Amplify Video Game Tech ETF (GAMR) and the Global X Video Games & Esports ETF (HERO) taking a different direction in strategy by following separate indexes.

That being said, ESPO has been an outperformer, nearly recovering all of its decline from the 2021 cycle peak, while GAMR and HERO are both still down more than 33% over the period.

In this case, ESPO’s positioning more towards large-caps has worked to its advantage in contrast to GAMR and HERO where emerging companies and smaller video game developers have a larger contribution based on their alternative strategies.

We can’t say definitely that ESPO will outperform GAMR and HERO over all timeframes going forward, but there’s a case to be made that its more concentrated portfolio helps to balance the risk in a corner of technology where small-caps and emerging video game stocks struggle for market shares compared to the more established players.

Companies like Nintendo and Electronic Arts benefit from the diversification that has been proven to resonate with gamers across different eras and market cycles. In our view, ESPO remains the benchmark video gaming ETFs.

What’s Next For ESPO?

The latest data suggest the worldwide video game market has resumed growth following a slowdown in 2022. According to Statista, the total market value across categories like online games and mobile games is expected to reach $282.3 billion this year, representing a 13% increase from 2023.

Notably, in-game advertising now accounts for the largest share of the global business and is a key growth driver. The same report forecasts that the total market is expected to grow by an average annual rate near 9% through 2027, representing a major tailwind for the underlying companies within the ESPO ETF.

The launch of new consoles expected in the coming years, including a new “Nintendo Switch” and even blockbuster gaming titles like the latest addition to the “Grand Theft Auto” series from Take-Two Interactive Software into 2025 could work to add sentiment towards the overall industry.

In terms of where ESPO is headed next, the ability of the global economy to remain resilient and avert recession with some room for interest rates to stabilize a bit lower could represent a positive catalyst on the demand side for the industry.

On the other hand, the fund’s connection to the “technology” sector and consumer discretionary trends means it remains exposed to shifting macro conditions and market-wide volatility. The possibility of an unexpected slowdown in video game sales or even country-level regulatory changes limiting the availability of gaming would likely open the door for a deeper selloff.

Final Thoughts

The attraction of ESPO is its unique positioning in stocks that are not typically widely held or constitutions of major broad market indexes. By this measure, the fund can work as a good option for investors to diversify an equities’ exposure, tilted towards a market theme that benefits from several secular tailwinds as video gaming continues to climb in popularity.

While it remains unclear whether the fund can outperform tech sector benchmarks, we believe ESPO should deliver positive long-term returns and ultimately reclaim its all-time high.

A key monitoring point for the video gaming industry is the regular updates on game sales and news from the major console or computer platform developers.