Video games have become more enjoyable for a wide range of users, regardless of their demographics. In the future, technologies like artificial intelligence (AI) and the Metaverse could revolutionize video games and make them a more appealing investment. Esports are also gaining in popularity. Since then COVID-19 pandemic. In the future, this industry could become as common as physical sports. Esports allows aspiring players the chance to experience intense competition without the worry of bodily injury or other health concerns.
Video game markets may be a niche component of the larger communication sector. This could create a concentration risk, which can negatively impact the market as macroeconomic conditions deteriorate. The same is true for video game-focused investments. They are unlikely to have the same protection as securities that focus on communication. Due to these factors, I rate Global X Video Games & Esports ETF (NASDAQ:HERO( ) Hold.
Video games make up a small part of the communications sector, which is a large sector in the video gaming industry. In 2022, the video game industry was hit hard by the bear market. Both the value and number of deals closed dropped. Video game sales fell from 2021 to 2022, and I expect that the consumer market in this area will continue to be disrupted by the end of 2018. Many digital gaming franchises will face another uphill struggle in 2023 as recession fears continue to grow. The long-term growth of video game revenue is expected to continue. And this form could gain even more fans than it does now. The short- to medium term path looks quite bumpy.
HERO tracks the Solactive Video Games & Esports NR USD Index and utilizes a full replication technique. The index is comprised of companies who are poised for increased consumption of video games and Esports. These companies are primarily video game publishers and developers, but also content distributors and streaming service providers. At least half of the revenue generated by qualifying companies must come from video games or esports. The market cap of these companies must also exceed 200mm and the average daily turnover over the last six months is at least $2mm. This ETF is reweighted every six months.
This ETF is primarily focused on communication, with a little bit of consumer cyclical and technology.
HERO is primarily a holding of companies in the United States and East Asia. East Asian countries that are represented by this ETF include Japan South Korea Hong Kong. This ETF is dominated by regions with relatively lucrative video games industries.
This fund has just under 50 holdings. The 10 top stocks represent just over 50% of the total portfolio. The top four stocks of HERO make up about a quarter.
Investors may wish to consider their comfort level with letting a small number of stocks move the market.
Esports is a growing industry that is poised for long-term success. Both competitors and fans are becoming more interested in the esports scene. According to the chart below revenues could reach $2.2B by 2027.
The growth of the esports sector could increase the demand and popularity for certain videogames, ultimately driving up the price of HERO.
This ETF is a unique alternative to an all-encompassing communication fund for those with a particular interest in the videogame industry. HERO may offer a more focused exposure compared with some other options, but also provide the diversification benefits not found in individual video game shares. This aspect could be more prominent as the number video game enthusiasts also increases.
HERO underperformed some of its competitors with broader focuses. The narrow focus of this ETF may be appealing to those who have more specific interests but could also hinder profits. Below, HERO’s 2023 performance is compared to other ETFs covering the communication services sector.
HERO’s pace is clearly lagging behind that of some of its competitors. This ETF’s momentum may be lagging behind funds that are more strategically focused on the most profitable communication areas. Communication Services Select Sector SPDR Fund ETF(XLC) is a notable example. Investors should consider the profitability of videogames compared with communications in general and if HERO’s niche is worth the cost of choosing it over another ETF.
This ETF also has a volatile performance, which could be due to its narrow focus on videogames, rather than other communication channels like internet, broadcasting and social media where there may be more opportunity for innovation. In my article on the Invesco NASDAQ Internet Fund (PNQI), I covered the Internet as an industry.
Virtual Reality (VR), and Augmented Reality, (AR) have become more popular as they offer gamers a more immersive, realistic experience. Metaverse developments have also given VR and AR a lot of momentum. Meta (META), I think, has the ability to revolutionize gaming through this project. Growth in the Metaverse, VR and AR can catalyze demand for videogames and increase the price of HERO.
Content creation as a profession is also gaining in popularity, particularly among the younger generation.
Video games are the primary source of material for these creators. Growth in this sector could spur growth in the video game market. This could give HERO the much-needed momentum it needs in the future.
Consoles for video games and the games themselves have become more expensive. For many, this is more of an extravagance than a necessity. In a recession, video game demand could be affected. Microtransactions have become an integral part of many video games. Video game companies have already benefited from this component. As prices rise, the microtransactions may discourage consumers, reducing their enthusiasm and demand for video games.
Online multiplayer is an integral part of many popular game franchises. It is loved by many because it allows gamers to meet other people and compete against actual people, rather than computers processing units. The same aspect of online multiplayer could also create privacy and security problems. With AI systems becoming more accessible and powerful, it could be easier to access large amounts of data from users for exploitation purposes. This threat will become more prevalent sooner than later.
You can also read our conclusion.
The video game industry will likely become more popular in the future, but it is not recession-proof. Niche funds, especially small-caps, could be a great investment in the future, just as video games are. But, for now, the economic outlook warrants caution. Investors may do better with communication funds that are more widely focused in tighter economic conditions. I therefore rate HERO as a Hold.
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