You don’t need to ever hold a controller, flip on a console or have your Kinect creepily follow you across the room to appreciate video gaming.
All you have to do is love money.
Video gaming is a rapid-growth tech industry that’s seeing its fortunes simply explode, thanks to numerous factors, include the expansion of Internet gaming, mobile gaming and breakneck growth in Asia. All told, this market is expected to leap into the hundreds of billions of dollars by 2017.
No surprise, then, that a fund provider has gotten itself into the game.
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PureFunds recently launched an exchange-traded fund — the PureFunds Video Game Tech ETF (GAMR) — meant to piggyback the rip-roaring potential in this space. It’s a who’s who of the companies most likely to see their fortunes grow if video game stocks boom as the industry booms.
But some think industry growth is far from a sure thing — and the going for GAMR investors could be tougher than trying to play “Battletoads.”
Video gaming is worth a lot of credits. The video game industry, niche as it might seem to outsiders, is a global market that’s staring at 8 percent annual growth — growth that should carry it to $107 billion in 2017, according to Newzoo. That’s in part being driven by breakneck growth in Asia, with China’s contribution from the market expected to roughly double from $12 billion in 2013 to $23.4 billion in 2018.
Every big dog wants in. Microsoft Corp. (ticker: MSFT) and Sony Corp. (SNE) have been in the game for years via their Xbox and PlayStation consoles. But more recently, Amazon.com (AMZN) bought video game streaming company Twitch in 2014 for nearly $1 billion. And over in China, Alibaba Group Holding (BABA) recently announced it would be hosting a multi-game eSports tournament.
Moreover, Andrew Chanin, CEO of PureFunds, told U.S. News & World Report that sees opportunities in gaming that extend past gaming.
“With the development and creation of things like virtual reality and augmented reality, we’re noticing that it’s something that isn’t just entertainment — it’s currently and increasingly going to be used in education, simulation and training,” he says. “These are things that are going to allow gaming to be monetized in so many different ways beyond just the entertainment side.”
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So while Facebook (FB), which recently put its hat in the gaming ring with March’s launch of the Oculus Rift, isn’t currently a holding, it very well could be — whether the Rift is used to score points, watch instructional movies or design a room.
“Virtual reality is not a major focus of the fund yet, but it provides for that,” Chanin says. “As it becomes a larger aspect of the gaming industry, it’s something that could become a larger exposure to the fund.”
The problem is whether the juice is worth the squeeze.
A high difficulty level. GAMR is a collection of 36 stocks related to gaming in one way or another — be it pure-play video game publishers like Activision Blizzard (ATVI), as well as “non-pure plays” and “conglomerates.” Apple (AAPL) is a great example of the latter, as it’s clearly not a gaming company and gaming makes up a tiny portion of its revenues, but it very much does have a significant hand in the gaming industry (and does earn some money from the industry).
Still, pure-play video game stocks make up about 80 percent of the fund, including large holdings in producers like Activision (9 percent), Square Enix Holdings Co. (5.5 percent) and Konami Holdings Co. (5.3 percent). It’s also heavily concentrated up top, with its top 10 holdings making up more than 55 percent of the fund.
And therein lies the potential for a bumpy road.
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“If you’re looking for tech companies with high profit margins, occasionally high growth rates and which sell products — like “Grand Theft Auto” — known to all your friends, then investing in video game stocks has a certain appeal,” says Barry Randall, technology portfolio manager on Covestor, a registered investment advisor based in Boston. “Less appealing is the hit-or-miss aspect of gaming itself, where sales and profits depend heavily on the unpredictable tastes of mostly young men.”
“My simple advice is that individual video game stocks are trading vehicles, not long-term investments. For example, although Electronic Arts (EA) has been a public company for about 25 years, it has been wildly volatile and traded in the low teens as recently as mid-2012.”
Duncan Rolph, managing director of Miracle Mile Advisors, says that there’s danger in the field.
“The gaming industry is experiencing significant growth, but many of these companies are still young companies and are not yet profitable,” he says.
When asked about GAMR, most negative opinions were simply an extension of this idea — not that the fund itself is bad, but that video gaming can be a volatile ride.
“GAMR will give traders an easy-to-own way to get exposure to the multibillion-dollar video game space,” Randall says. “But investors with longer time horizons hoping for similar exposure to the video game industry should recognize the cyclical and seasonal nature of the industry.”
However, Randall does think expenses are on the high side.
“With a 0.75 percent expense ratio, and with 50 percent of the GAMR ETF’s net assets in just nine stocks, you could easily create your own video game portfolio and might do so more cheaply, depending on how much you pay to trade,” he says.
Rolph says the video game industry could be a roller-coaster ride for investors willing to step in.
“An investor interested in the gaming industry, but not familiar with individual names should consider GAMR,” he says. “However, the investment should be a satellite holding and the investor should be willing to accept significant price volatility.”
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GAMR: A Video Game ETF For All-Pro Investors originally appeared on usnews.com
