This week was a tough one for video gaming stocks. Stock prices for several major publishers and developers tanked, after the firms reported disappointing quarterly earnings and expressed grave concerns about their future.
Electronic Arts (EA) dropped 15% on Wednesday after missing revenue targets and cutting its annual outlook, while Take-Two Interactive Software (TTWO) fell 13% after revising its next-quarter forecast to a lower-than-expected level.
EA blamed “intense competition” in the space, especially from the free-to-play category of games, including the smash-hit multiplayer shooter, “Fortnite.” Meanwhile, Take Two hit its earnings targets, but also admitted it had plans to pursue a “Fortnite” competitor.
The companies’ financial troubles also dragged other video game stocks lower. Activision Blizzard (ATVI) fell 10% Wednesday (even though it doesn’t report earnings until next week). Ubisoft and Nintendo also fell.
Those financial troubles also impacted the $96 million ETFMG Video Game Tech ETF (GAMR), the largest video game stock ETF. Since Wednesday, GAMR has fallen 3.4%. Year-to-date, however, GAMR remains up 7.9%:
Source: StockCharts.com; data as of Feb. 7, 2019
GAMR has remained relatively buoyant in the face of such a disappointing earnings season because its portfolio is broader than just video game publishers and developers.
The fund holds a portfolio of 80 stocks broken into various buckets: “pure play” hardware and software developers, “nonpure play” supporting firms and “conglomerates,” whose business extends beyond just the video game business. As such, GAMR holds a range of toy companies, internet services and software companies, in addition to its hardware and electronics firms.
Furthermore, only 27% of its holdings are in U.S. companies, mitigating the impact any single American publisher will have on the overall portfolio. Meanwhile, 25% of the holdings are from gaming heavyweight Japan, and another 18% from Korea.
Competition From VanEck
For years, GAMR was the only video game ETF on the market. In October, however, the $9 million VanEck Vectors Video Gaming and eSports ETF (ESPO) launched, with an emphasis on eSports companies.
Even though ESPO is 0.20% cheaper than GAMR, carrying a 0.55% expense ratio, it has yet to draw many assets, possibly because a video game ETF—like many thematic investments—tends to be a high-conviction play, with investors willing to stick out periods of bad performance.
Neither fund is particularly liquid or well-traded, and considering how liquid the underlying stocks are, both funds carry fairly wide spreads (ESPO’s is 0.13%, while GAMR’s is 0.22%). Interested investors should tread with care.
Contact Lara Crigger at [email protected]