Motley Fool Stock of the Week: VanEck Vectors Video Gaming and eSports ETF (ASX:ESPO): July 28, 2021

g'day fools i'm scott phillips and welcome to yet another in our expanding and ever popular series of motley fool stocks of the week this is the series where we bring you a buy recommendation from one of our services now you know the drill by now but i'm going to do it for new listeners new viewers so make sure you understand exactly what you're getting at motley food stock of the week let's do it three things i tell you every week the first is this is a current buy recommendation at the time of recording we hope it won't change anytime soon but we won't guarantee it so if you're watching this weeks months or years into the future just be mindful of that it may not still be a current recommendation second thing this is personal general advice not personal advice uh please make sure you understand the fact that it may not be appropriate for your circumstances go and see a financial advisor if you need to and thirdly that we are long-term investors this is not a prediction over the next day week month or even year we are looking out multiple years to investments that are going to be long-term market leaders because that's where the value is the value of compounding is the last fraction the last proportion of your investment horizon that's often where all the money or most of the money is made so we're looking for the long term we're not doing short-term predictions we have no idea where the share price is going next but we believe over the long term that our buy recommendations in general and our stocks of the week in general and on average will be market b has that certainly been our experience thus far what we're hoping to keep doing for you over the long term all right that's out of the way drum roll please yep the analyst we're bringing you today is andrew leggett today andrew how are you mate hey scott doing pretty well good man good man hey y'all we're gonna do something a little bit different this time not terms of the format but in terms of what we're bringing our listeners and viewers i think this is the first time we've talked about an etf now oils ain't oils and etfs ain't etfs at least not anymore there was a time when etfs were all about the broad market indexes the the asx 300s or the s p 500s these days an etf can be pretty much anything and apparently in the us there's actually more etfs than stocks so popular are these things these days and this is one of those right it's not your low cost index fund this is a very specific etf it is the esports etf now uh mate you're a bit younger a bit cooler than me so you've got more experience with these sports i'm looking forward to hearing about this one let's start with what esports not the company but the security is and maybe start with exactly what esports is and what the etf's made up of okay so the full name and it's quite a mouthful for this particular security we're talking about is the van eck vectors video gaming and esports etf so that's a big kind of name to remember the asx code the asx code is e-s-p-o that's a lot easier to remember so what this does is it gives it investors exposure to a diversified portfolio of the largest and most liquid companies in the video game market we're talking developers hardware create hardware manufacturers software providers and other companies that are in that video gaming esport world and it seems really kind of silly when you first think about it video games it's just something that we do to pass the time but it's actually a fascinating area to dig into and i'll just start by saying saying this the video game industry is huge it is larger than the music and movie industry combined that is how that's how big this market is and it makes sense when you start thinking ever like there's around two to three billion smartphones in the world that you can play mobile games on add in all your sony playstation xbox consoles and the odd atari playing around sitting around for the people that want to stay retro yeah i remember the first time around mate don't know about retro i i lit that the first time it's a classic and it's a classic for good reason exactly i'll take it yeah so it's it's a huge market and it's been growing pretty well too i think in 2020 it grew over 20 a year and it's been doing those kind of numbers for a while and i think and what we'll get into is i actually think there's still a long pathway for this industry to go but we'll move back a little bit okay so we thought everyone knows what a video game is just the games you play at home frogger pac-man yeah that sort of stuff yeah frog kroger pac-man fortnight grand theft auto for the first oh now now you're getting out of my league with the kids today or valorent if you want to get really into it um yeah so but esports might be something that is off the radar to many people and so i'll touch on that a bit so esports is competitive gaming and it is a big business in itself so one start i'll bring out is so the 2019 league of legends world championship so league of legends is a video game a very popular one created by riot games in 2019 the world championship had a combined viewership people who tuned in to watch that of over 100 million people that is more people than watch the super bowl in the us so and i could go on to i checked in preparation for this video today to go on twitch which is the popular video game streaming channel where they do broadcast esports but also just individuals playing games and that's a bit of a market in itself where people can earn a living by playing video games which sounds great and i wish i knew that you know 10 years ago uh you know and there was over at that very point in time just a random point in time there was over 1.5 million people tuned in to watch the top 10 video games you know the combined all the streamers that were you know playing the top 10 video games on twitch that had a combined audience of 1.5 million people right now and that's just regular figures so the esports market is big it's growing and it's especially big in asia and that's where a lot of these uh you know they will book out stadiums like the olympic stadiums and you know the biggest arenas and they will pack that with people who essentially come to watch a screen of people playing video games and they get really into it and now moving back to video games in general uh i mentioned streamers uh you know they're becoming more into the mainstream there's a famous streamer called ninja uh who was playing fortnite and he signed endorsement deals with adidas and red bull and all these companies and was even on the cover of sports illustrated and you look at these video games too they're becoming increasingly big platforms especially during covert we had very popular live concerts on fortnite and roadblocks that had audience in the millions you know you can't do that in real life you can't pack a million people into a stadium to watch a you know a rapper perform live and something that also a lot of people may not know pizza hut has even signed up as a naming rights sponsor to a virtual stadium in so if you play the electronics arts titles madden nfl 20 there is a stadium in there that is sponsored by pizza hut and that's because video games are incredibly powerful tools for engagement people will sit there and play for hours and because of that if you get your brand involved brand in front of them for hours then you're probably going to get a better payoff than if you just run a random ad on tv that people might not be actively paying attention to all right so moving into the moving into the why let me let me take you back half a step before we get into more of the why you like it so this is an etf it's an actively managed etf is my understanding where van necker choosing a range of video game makers esports games slash network slash streaming services putting them together in some sort of structure based on some sort of analysis and methodology and then making that available to people like you and i on the asx is that a pretty good summary yeah so i've talked about what the industry is and you know some of the some of the info some of the kind of i guess the bull case the the the tail what are pushing it forward now we'll get into what the etf actually is so the etf has 26 companies in there and you're right it is an actively managed etf okay the companies that you're getting in there you're going to have chip manufacturers like nvidia and advanced micro devices you're going to have developers like activision electronic arts and take two interactive you've got these big gaming businesses big diversified gaming businesses like 10 cent and nintendo and you've got others like you know unity software whose gaming engine is pretty much used by the vast majority of mobile games that people play today so it's a it's diversified it gives you you know a bit of everything that's kind of important in the video game industry um so you're not just getting developers you're getting the hardware you're getting the software the people who make the games distribution all of that stuff in one place but like i said it does only have 26 names so it's not the most diversified by the fact it's focused on a single sector it can't be diversified by definition that's right yeah and the top 10 companies do account for around 60 of the portfolio waiting so but broadly you're getting a diversified investment in video games and esports managed by someone who in theory knows what they're doing you're making a bet on the sector as a whole because even the best manager in the world can't help you if the sector crashes so you're betting on the sector to some degree and the growth of that you're betting on the manager's ability to hopefully select the right companies in the right proportions then buying and selling those at the times when they represent the best value is that that kind of a reasonable summary of what the etf represents yeah so i mean it it's largely market cap driven so you're getting the big ones right rather than the a portfolio manager kind of picking well i think this one is going to win and this one's going to not win it is base you know they're the biggest and most liquid so but it is a bet on the sector um and all of those trends that i was talking about before continuing into the into the future so that's kind of the nitty-gritty of what you of what you're getting and the last thing i guess i'll point out is these are i think entirely overseas based companies so you're getting on one hand diversification on the other hand you're getting currency risk and exposure depending which way it wants to go uh and to some degree the benefit of video games are global right it couldn't it couldn't be a better representation of of exactly that but you are you're buying on the asx but you are buying effectively us and european businesses maybe asian businesses as well yeah yeah definitely you're getting it yeah so you're getting u.s businesses getting asian there's some i think there's a couple from europe in there there's also a management fee as is the case with you know etf products i think it's around 0.5 um yeah and and the risks are obviously you're betting on a sector so anything that negatively impacts that sector is going to hurt the performance of this underlying etf and there's also something come to the right don't don't don't give this away yet we're gonna have to do the rest in a second so just just hold the horses okay let's let's that's all good let's go to the ball case so you've kind of already told a little bit about the size of the sector why it's interesting why it's exciting um as you say people like pizza hut are handing over cold hard cash for virtual naming rights uh that tells you something when you're shopping something real for something virtual you better believe there's something real about the virtual if i can mix the metaphor um tell us just give us the ball case obviously i think we can probably imagine from what you've already said or we could imagine what might happen in future why this might be worth investing in but just give me this from your perspective a couple of the key points of the ball case as to why you think an investment in this video gaming and esports etf is worth making okay so video games are an incredible platform like i said they can actively hold people's engagement for hours on end which is what advertisers want and which is why advertisers are flocking to uh video games it is a very popular field i expect that to continue if not get better there is also increasing optionality around the various companies that make up this etf i've talked about the live events but going back to something like unity software yes they make video games but gaming engines like unity software users or what unity unity software sells that software is also increasingly being used in other industries such as entertainment and construction because of the ability to create and st and simulate you know actual real world scenarios because they have physics engines you can build buildings in them all and you can see what happens if you know something happens to it so there is this added optionality and this comes into the next big thing and uh there's potentially a long way off but it's something that i've been thinking about and i do think is going to happen sometime is what's called the metaverse or if you've read the book ready player one they called it the oasis which is this completely immersive digital world that with the help of vr and things like that people can get into and i think these companies are gonna if that ever happens and that will become a huge business in itself and we've seen companies like roblox actually call themselves a metaverse company because they are creating this platform where developers can build individual worlds for people to visit then these companies are going to be the ones that are really the driving force behind that so that's the so the metaverse the really big kind of you know you know small probability but huge thing in the future but yeah all right everything i'm also saying about you know the gaming engines the advertising the live events that's happening now and that's going to at least in my view increasingly happen in the future so that's why i expect the gaming industry to continue growing at a decent rate and why we're here talking about this etf today i like it so you've got an industry that's already existing but is growing and you expect to keep growing more people spending more time on it being monetized at greater levels and as you rightly point out even though there are already more people watching some esports events than than the super bowl you can imagine a scenario where the seven billion people on earth a decent minority of those are going to be tuning into one or many events as a as a spectator sport i'm going to say mate i'm way too old to enjoy esports if i see someone playing i want to grab the control and have a go myself but i'm also mindful as you say that one and a half plus people at a time are watching other people play games as a spectator sport and it's really working for them so i think that's if you're watching this and you're like me you think ah that's not possible of course that wouldn't happen remember that uh i you are not necessarily the audience and plenty of people watching by the way are saying hey i'm there i'm already on twitch i'm already watching this stuff i'm already seeing the pizza hut stadium uh all that stuff as you say that's happening and will likely continue to happen i quite like and it's also fair to say mate and you've kind of alluded to this but the fact that it's an etf means you don't have to actually pick the winner or one or two of the winners maybe it's unity maybe it's activision blizzard maybe it's nvidia maybe it's all of them but to some degree the very existence of the etf means that if the theme is right and the opportunity writ large is right yes you won't make as much money as you pick the one winner by definition because averages are always lower than the the highest number in the field so you're not going to get the best possible return from one of those 26 businesses you're also not going to get the worst or the third worst or the fifth worst you're probably going to get some sort of reasonable diversified exposure as you say single sector so not diversification in the traditional sense but you don't have to pick the winner you can find a trend you like and go from there is that fair to say that's that's exactly it yeah nice all right let's go to the risks then so um you've kind of alluded to that a little bit already but what might happen to make an investment in this video gaming esports etf a bit of a loser if i can use the gaming term uh what's what's going to what's going to cost you money if this goes badly so yeah it's an etf that's based on a single industry anything that happens to that industry that reduces the growth of that industry is going to negatively impact the performance of this etf there's no way of getting around that also because it's a lot more concentrated than your typical index etf like i said the top 10 companies make up around 60 of the portfolio you're not getting that usually you can completely wipe company specific risk off when you've got this really huge diversified etf this isn't the case here the top 10 companies make up 60 of the portfolio it's nvidia's the largest and that is impacted not just by the gaming market but a few other markets it's also in cryptocurrency autonomous vehicles all of that type of stuff so if something happens to one of those main businesses that's really bad and you know so competition you know some type of really negative event you know let your imagination run wild it's going to hit it's going you're not going to be as protected as you would if you bought say you know the vanguard msci international index which has 1500 companies in there and the top and the top companies only like five percent so that's the biggest risk uh and it all revolves around the gaming industry for some reason stop growing or fizzling out and you know perhaps people just decide that they prefer to listen to the radio during the day rather than play video games old people uh yeah there's also like i said management fee that needs to be considered because it will eat some of those returns uh you've mentioned the foreign exchange uh movements that's an easy one for investors to forget but it's real uh any adverse movements in foreign exchange is going to hit the performance as well but those are the general kind of risks relating to this etf makes sense i'm going to add one or at least propose one you can tell me if you think you're right or not this actually isn't a risk but when we're talking about risks we need to make sure investors are aware of potential movements and share prices now we would be the first to say maybe the second to say volatility and risk are not the same thing and so just because a share price or an etf price can be volatile does not mean it's necessarily risky or doesn't add to the risks as long as your time horizon is long enough but i would say mate because this is a pretty cool sector that lots of people are kind of excited about but equally that sentiment can wax and wine there may be long periods of outperformance driven on not much more than sentiment and potentially long periods of under performance under performance driven on not much more than sentiment either just because people get excited about it they get pessimistic about it backwards and forwards so even separate from the underlying businesses themselves and the overall performance of the sector i wouldn't be at all surprised i think you may have a different view but i wouldn't be surprised to see this go through meaningful periods of great performance and then potentially longest like 12 months plus periods of just when everyone's kind of given up on the thing they've walked away something else is more exciting and shiny and important um i wouldn't be surprised in the medium terms this sentiment have a more significant impact on a sector like this as it might say tesla or netflix or a business that just people get excited and then very pessimistic about is that is that in your wheelhouse as well yeah i mean that's going i think you know a lot of people have been talking about the attractiveness of video games as an investment and how big that world could be that could obviously change next year when the next hot thing comes up that everyone's talking about so yeah you're going to see volatility which is true for any any company um for any investment so yeah expect it here as well there you go but let's sum it all up for me give me my patented well i don't think anyone's yet done a 60-second elevator pitch in 60 seconds but i'll i'll continue the challenge eventually i'll get one i'm sure uh but give me the 60 second elevator pitch if you're stuck in an elevator i'm going from the first or 31st floor with you what is the quick one-minute pitch on why i should buy the esports video gaming etf e-s-p-o okay so the video game market's huge it's been growing i expect it to continue to grow as not only more and more advanced games come out in the market but also all the other ways that is increasingly monetized that i've spoken about the live events the advertising the separate uses for gaming engines all of that type of stuff and then there's potentially big things happen in the future so with this etf you get exposure to that industry and you don't have to try to pick winners and that is my quick elevator pitch i reckon you pretty much now i might have to get the timer put on this one for next time i might uh we might try and increase the uh uh increase the production values we'll see we'll see how we go i'll ask i mean our resident good roof we can do that next time you've gotta wait with this time it won't be this time i won't do it to you after the fact but uh maybe from next week we'll see how we go andrew thank you for bringing us the video gaming and esports etc the vanek vector video gaming and esports etf how did i go is that roughly right that's the one you got it all right e-s-p-o on the asx fools if you've enjoyed this remember this is both a podcast episode and a youtube video yeah we're multitasking if you're listening to it on the podcast firstly thank you for subscribing to motleyful money but also don't forget you can get this and more whether you want to see me as an open question you can see andrew and his conviction on the youtube channel just simply go to youtube and look up the motley fool australia you can see all of our videos there we're doing heaps of putting our heap up at the moment uh maybe eight or ten videos a week we're kind of averaging right now which is awesome so if you're not there you're missing out make sure you like and subscribe and hit the notification bell if you're watching this on youtube firstly thank you if you want some music for your ears there are some podcast episodes like this but also some others on our podcast motley fool money jump on your favorite podcast machine to look that up you can get all the great podcast stuff that we have to bring you a couple of episodes a week plus this one we do a general news of the week a podcast episode myself and andrew page and we do our most popular mailbag episode on a sunday afternoon where you get your questions answered so make sure you do check that out um we're across all the socials as well let me do a really quick run-through of those andrew you're on twitter at andrew leggett that's right isn't it that's the one beautiful are you on instagram yet with a with a uh professional profile or is that uh beyond the bailey book thus far i am on instagram but there's nothing there feel free to follow me feel free to follow me but i don't know what my name is on there i can't remember and you're not gonna see it you can find him it's like the a-team if if you need help but if you can find him follow andrew leggett on instagram in the meantime if you are on twitter or insta you can follow me at tmf scott p you can follow the motley fool on twitter and insta at the motley fool a you you can follow us on facebook the motley fool australia so facebook.com forward slash the motley fool australia or facebook.com forward slash scott phillips money we're on all the platforms not yet on tick tock andrew's been pushing me for that one we may at some point but no one wants to hear my scene you'll see my dancing so that's a that's an issue for tick tock but we'll see how we go on that one in the meantime jump on the other social follow us there and again make sure you subscribe to the podcast and like and subscribe and hit the notification bell on our youtube channel until next time and next week's stock of the week full on [Music]

Channel: The Motley Fool Australia

Views: 4,114

Rating: 4.9411764 out of 5

Keywords: stock of the week, asx shares, asx 200, best asx shares, asx buy recommendations, asx:espo, esports etf

Id: rz5vRxbTMu8

Length: 24min 24sec (1464 seconds)

Published: Tue Jul 27 2021