Tapping Into Video Games And Esports

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Includes: ESPO
by: VanEck

Upon the release in 1970 of the very first home video game console, the Magnavox Odyssey, few would have guessed that its arrival heralded the birth of a multibillion dollar industry. And yet, humble and crude though its technology seems by today's standards, the Odyssey was nothing short of revolutionary. It foreshadowed the introduction by Atari of its smash hit Pong in 1973, which laid the foundation for increasingly accessible, user-friendly, and popular video games enhanced by technological advancements.

Today the video game and esports, or competitive video gaming, industry is an economic powerhouse. In 2017, the video game market's revenues grew 10.7% - even faster than expected - reaching $116 billion.1 Esports, a still-nascent entertainment category, has been registering staggering growth - averaging over 40% revenue growth per year since 20152 - and is estimated to reach an audience of 380 million people worldwide in 2018.3

The Rapid Rise of Video Gaming and Esports

But what exactly is esports, and what does its growth portend for the video game industry overall? Collectively, the term "esports" refers to professional competitive gaming. Players can participate in contests for prize money (Kuro Takhasomi, the world's highest-earning player, has earned $4.1 million4 in his professional career so far) and, increasingly, audiences are attending live events and tuning in to live streams to follow their favorite gamers and teams.

Although some of the first video game tournaments took place in the 1980s and 1990s, many consider the dawn of modern esports to be the 1997 Red Annihilation tournament for the first person shooter (FPS) "Quake," where over 2,000 participants competed for a Ferrari previously owned by the lead developer. Major League Gaming (MLG), launched in 2002, was the first professional esports organization to broadcast on American television, with a Halo II tournament in 2006. Today, MLG is the largest and most successful gaming league in the world. A 2013 MLG tournament awarded gamers more than $170,000 in prizes.

U.S. Sports Viewership vs. Esports Unique Viewers

Source: Sports Media Watch, Statista.com, dotesports.com, lolesports.com.

Incredibly, the 2017 League of Legends World Championship attracted more viewers than the deciding games of the MLB World Series, the NBA Finals, and the NHL Stanley Cup that same year.5 Esports gained another credibility boost in July 2018 when the International Olympic Committee hosted its first Esports Forum to build a better understanding of esports and explore future engagement with the industry.

Clearly, esports is here to stay. Though still in its infancy, esports is growing rapidly, and is projected to generate approximately $906 million in revenue in 2018, an astonishing 38% increase over 2017's $655 million.6 By 2021, revenues are projected to reach upward of $1.7 billion.7 In the context of all of this growth, the future certainly looks bright for the video game and esports industry, with total revenues projected to be as high as $165.9 billion by 2020.8

Esports Average Revenue Growth

Source: Newzoo Global Esports Market Report, 2017, 2018. 2018 is projected.

With a demographic largely made up of a relatively young and affluent audience, high revenue potential, and growing acceptance and recognition beyond a niche audience, we believe the video game and esports industry may present an exciting investment opportunity.

Capturing the Space: Investing in Esports and Video Games

With targeted exposure to players in "the future of sports", the VanEck Vectors Video Gaming and eSports ETF (NYSEARCA:ESPO) provides investors access to what we believe can be a long-term growth story. The ETF's holdings include video game and related software developers, streaming services, companies involved in esports events, and more. To be initially included in its underlying index, the MVIS Global Video Gaming and eSports Index, companies must generate at least 50% of their revenues from video gaming or eSports. This targeted and pure-play exposure may offer investors portfolio diversification away from technology giants like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT).

IMPORTANT DISCLOSURE

1Source: Newzoo Global Games Market Report Q4 2017 Update.

2Source: Newzoo Global Esports Market Report, 2017, 2018. 2018 is projected.

3Source: Newzoo Global Esports Market Report, 2018.

4Source: esportsearnings.com, as of 11/5/2018.

5Source: Sports Media Watch, Statista.com, dotesports.com, lolesports.com.

6Source: Newzoo Global Esports Market Report, 2017, 2018.

7Source: Newzoo Global Esports Market Report, 2017, 2018.

8Source: Newzoo Global Games Market Report, 2018.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Indices are unmanaged and are not securities in which an investment can be made. Index returns do not reflect a deduction for fees & expenses. Certain indices may take into account withholding taxes.

Diversification does not assure a profit nor protect against loss.

MVIS Global Video Gaming and eSports Index is the exclusive property of MVIS (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Video Gaming and eSports ETF is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.

An investment in the VanEck Vectors® Video Gaming and eSports ETF (ESPO) may be subject to risks which include, among others, investing in the video gaming and esports industry, information technology, equity securities, foreign securities, foreign currency, special risk considerations of investing in Asian, Japanese and emerging markets issuers, depositary receipts, small- and medium-capitalization companies, cash transactions, market, operational, index tracking, authorized participant concentration, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small and medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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