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The massive success of the blockbuster hit Black Myth: Wukong has reawakened investors to the massive potential of the global gaming industry, and the VanEck Video Gaming and eSports ETF (ESPO) is a great way to gain exposure to this growth.
I’m bullish on this gaming-focused ETF based on its strong recent performance and its ability to offer investors diverse geographic exposure to the massive growth potential of the global gaming industry by investing in gaming stocks worldwide.
What Is the ESPO ETF’s Strategy?
According to Van Eck, ESPO invests in an index “intended to track the overall performance of companies involved in video game development, esports, and related hardware and software.”
Companies must initially derive at least 50% of their total revenue from gaming or esports to be included in the index.
The Global Gaming Industry Harbors Massive Potential
The gaming industry is a promising sector, experiencing rapid growth with strong expectations for continued expansion. PWC projects that revenue for the global video game industry will surpass $300 billion by 2028, up from $227.6 billion in 2023.
Meanwhile, Grand View Research predicts that the market will grow to an even more impressive $583.7 billion by 2030.
There is quite a bit of distance between these two estimates, and a lot can happen between now and 2030, so any forecast should be taken with a grain of salt. However, regardless of the specifics, the gaming industry looks well-positioned for long-term growth.
Black Myth: Wukong Shows that Gaming Is a Massive Market
The numbers look promising, and Black Myth: Wukong’s explosive entry into the gaming scene highlights the immense power that blockbuster gaming titles from international developers have to generate massive revenues and profits.
The game was developed and published by Game Science, a publisher that ESPO’s top holding, Chinese mega-cap stock Tencent Holdings (TCEHY), owns a 5% stake in.
Black Myth: Wukong became China’s first-ever AAA gaming title, a designation usually given to the biggest blockbuster games from big-name publishers. Within 24 hours of its release, it became the second-most played game of all time on the Steam platform, selling over 4.5 million copies and boasting an incredible 2.1 million concurrent players. Within three days of its launch, Black Wukong had sold 10 million units.
Xiabang Su of CraneShares explains that over 300 million yuan was invested in the development of Black Myth, and that the game generated sales of 1.5 billion yuan on day one. CraneShares is an investment management firm specializing in China-focused ETFs.
While Black Myth: Wukong has been an unquestionable success, this could just be the tip of the iceberg for Chinese gaming titles making a worldwide impact. Dino Ying, the chairman of Hero Games, which co-published the game and was an early investor in Game Science, recently told CNBC, “I think the next AAA game is likely very close, because Black Myth: Wukong has shown everyone that a China-made AAA game can reach such high global sales.”
Furthermore, while Black Myth: Wukong’s 2.1 million concurrent players shortly after launch were indeed a staggering figure, Morningstar analyst Ivan Su reminded CNBC that this could just be the tip of the iceberg for blockbuster games in the country as China has 600 million gamers.
The title’s success both in China and beyond highlights the fact that there is a lucrative worldwide market for compelling gaming titles, and the ESPO ETF gives investors exposure to companies from around the world that develop and publish these games.
Global Portfolio
ESPO holds 25 stocks, and its top 10 holdings account for 59.0% of the fund.
Below, you’ll find an overview of ESPO’s top 10 holdings from TipRanks’ holdings tool.
While ESPO may not be highly diversified in terms of the number of stocks it holds, it offers investors a different type of diversification—geographic diversification. This allows investors to gain exposure to gaming companies from both China and other regions. Its top 10 holdings feature prominent names such as China’s Tencent and Netease (NTES), along with Japan’s Nintendo (NTDOF) and Capcom (CCOEF).
In fact, the fund allocates only 37.3% of its weight to U.S. companies, while Japan represents 25.4% and China accounts for 14.7% of the fund’s weighting. Other jurisdictions represented in ESPO’s portfolio include South Korea, Taiwan, Poland, and others. Thanks to this widespread global reach, ESPO can truly say it gives investors exposure to the growth of the global gaming industry.
ESPO’s Performance
ESPO has been on fire over the past year, with a scorching gain of 34.1% over the past 12 months that has pushed it to a new 52-week high.
Its long-term performance has been a bit more volatile, but overall, its trajectory is up and to the right.
Over the past three years, ESPO’s total annualized return of just 2.6% (as of August 31) is fairly underwhelming. Much of this lackluster performance can be attributed to a terrible 2022 that saw the fund lose 34.7% amidst a brutal market for growth stocks, which hit gaming stocks particularly hard. The fund quickly bounced back with a 33.6% return for 2023.
However, zooming out to a longer time horizon, its five-year total annualized return of 17.3% is much more impressive, outperforming the S&P 500’s (SPX) return of 15.9% over the same time frame (represented by the Vanguard S&P 500 ETF (VOO).
How Much Does ESPO Charge?
One drawback of ESPO is that its expense ratio of 0.56% is on the higher end. This means that investors will pay $56 in fees annually on an investment of $10,000.
If the ETF keeps performing like it has over the past year, most investors will be able to live with this, but it’s something for potential buyers to be aware of.
Is ESPO Stock a Buy?
Turning to Wall Street, ESPO earns a Strong Buy consensus rating based on 14 Buys, nine Holds, and three Sell ratings assigned in the past three months. The average ESPO stock price target of $77.88 implies 8.6% upside potential from current levels.
Looking Ahead
I’m bullish on ESPO. The global video game industry looks well-positioned for long-term growth, and the explosive success of Black Myth: Wukong shows that this is becoming a truly worldwide industry.
I believe ESPO is an effective way for investors to gain exposure to it due to its geographically diverse portfolio of top gaming stocks from around the world.
Disclosure