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Video games and electronic sports may be designed with entertainment in mind, but they have also proven themselves to be big business as well. With video game sales increasing at an annual rate of close to 11%, even as similar industries have seen declines, there appears to be ample room for investors to make a profit off of the entertainment of others in one form or another. It's no surprise, then, that there have already been several exchange-traded funds (ETFs) which have launched with a specific focus on the video gaming industry. Although the first video game ETF launched in just 2016, this segment of the ETF space has proved tremendously popular among investors.

Now, popular ETF provider VanEck has launched a fund which focuses on the electronic sports (eSports) industry. The VanEck Vectors Video Gaming and eSports ETF (NASDAQ: ESPO) is designed to track an index of 25 securities in the esports and video game areas.

Key Takeaways

  • ETFs are increasingly responding to investor demand for more targeted or niche offerings.
  • eSports refers to new competitive computer games that attract large audiences and fan bases.
  • The VanEck ESPO ETF is the first eSports-specific ETF that tries to capitalize the most from the popularity of eSports.

The "Future of Sports"

According to VanEck director of ETF product marketing Michal Cohick, the new ETF represents "an opportunity to invest in the future of sports." He claims that the audience for eSports tends to be young, well-to-do and highly engaged with the various competitors in the eSports realms, per a report by ETF.com.

VanEck associate ETF product manager John Patrick Lee adds that his company looks at it "as sitting at the heart of an ongoing revolution in how people consume media, entertainment, and sports."

To get a sense for just how large the eSports industry is, an event called the Midseason Invitational for 2018 managed to draw a larger pool of viewers than traditional televised sporting events like the World Series of baseball, the Stanley Cup, and the NBA playoffs. Indeed, 380 million people may watch eSports in 2018.

What has caused the dramatic rise in interest in eSports in recent years? It may be a perfect storm involving the increased popularity of video games, the increase in connections made possible by the internet and social media, and eSports' broad range of revenue streams. These may include the development and sale of video games as well as licensing for streaming rights, ticket sales, membership fees for leagues, and much more.

How ESPO Capitalizes

With the eSports realm primed for massive growth, ESPO has devised a methodology to capitalize on the interest in this area. The underlying index tends to include video game and hardware or equipment development companies. Getting outside of the gaming industry directly, ESPO's stocks also include companies which provide access to eSports events, such as streaming services. ESPO places a threshold of 50% of revenue on any potential company included in its portfolio: companies must derive half of their revenue (or more) from business related to eSports or other video games in order to be included.

Because of that last point, ESPO doesn't currently include many major eSports companies simply because those companies have a broad diversity of revenue streams. A company like Amazon.com Inc. (AMZN), for instance, is heavily involved in the eSports area but does not see at least 50% of its revenues generated from eSports.

For the time being, Asian companies (and Japanese ones in particular) represent an outsized portion of companies in the ESPO portfolio. Japanese companies represented 29% of the index at the time the ETF was launched. Among the largest companies included in ESPO's portfolio are Tencent Holdings, NVIDIA, and Activision Blizzard.

Investors looking to get a piece of the eSports trend can easily invest in this area with ESPO. The fund is listed on the NYSE Arca and carries an expense ratio of 0.55% as of this writing.