ESPO: A Gaming ETF Struggling To Reach The Next Level

Yaroslav Astakhov
The total number of users, i.e., gamers, is steadily growing, gaming revenues are trending up, and the space continues to evolve by leveraging new technologies such as virtual reality and cloud gaming. See the chart below which forecasts the growth in gaming participants.
Newzoo
Long-term growth is looking solid, especially due to the emergence of mobile gaming. For something that didn’t exist in the gaming world 15 years ago, it is now the method of choice for up to 75% of gamers worldwide. This makes sense from an accessibility point of view as anyone with a phone has access to mobile gaming.
Newzoo
Gaming revenues tell a similar story. While they don’t follow the same growth pattern as that of individual players, as displayed in the first chart, we aren’t surprised by the overall revenue projections shown above for 2026.
Despite the industry’s general growth trends, investing in a gaming ETF such as the VanEck Video Gaming and eSports ETF (NASDAQ:ESPO) doesn’t necessarily benefit from these gains. We’ll focus on ESPO as it is both the largest by AUM (about $250M) and has been around the longest (since November 2018). The primary issue for us is that the ETF represents a muddled mix of exposures along sectors, currencies, and regions, along with an uninspired performance record. It seems like both an unwise addition to a diversified portfolio and one that is lacking focus. For those reasons, we rate it a “hold.”
Is bringing your A-game enough?
ESPO seeks to replicate the MVIS Global Video Gaming and eSports Index (MVESPO), which tracks the overall performance of companies involved in video game development, esports, and related hardware and software. To be eligible for inclusion in the index, the following parameters are set: companies must derive 50% of total revenue from video gaming and/or esports, have a market cap of over $150M, maintain a three-month average daily turnover greater than $1M, and have a minimum trading volume of 250K shares each month over the last six months. Despite the low market cap requirement, the ETF currently holds only 29 securities, the top 10 of which make up 62.5% of the fund. See ESPO’s top ten holdings in the list below.
VanEck
Also of note is that 91% of the fund is in large-cap companies and the construction of the index is market-cap weighted. Essentially, ESPO is betting that the biggest names in gaming are the only ones that will continue to do well.
Additionally, since the index construction is rules-based, certain names that we might expect to get exposure to in a video game ETF are conspicuously absent. For example, out of the three major consoles (Nintendo, PlayStation, Xbox), only Nintendo is included in the index. Sony and Microsoft are excluded because they derive less than 50% of their revenues from gaming/esports. While we can argue about whether specific names should be included and to what degree, the inclusion rules ESPO has instituted for itself seem a bit too rigid for our liking.
Analyzing ESPO’s performance over time, we find middling results. In fact, if we look at its performance next to QQQ, representing the tech sector, and VOX, whose portfolio has roughly the same weightings as ESPO, it lands in the middle.
Data by YCharts
Below are the sector weightings for ESPO:
VanEck
It’s worth discussing ESPO’s performance during pandemic lockdowns and afterward. During the global pandemic, everyone was forced indoors, a perfect storm for a boost to the gaming industry’s bottom lines, and ESPO’s returns reflect that. However, as virus apprehensions eased and the world returned to relative normalcy, outsized returns subsided. Do we need another catalyst on the level of COVID to see meaningful performance?
To be clear, performance during the same time period for other gaming-centric ETFs was very similar and ESPO, in fact, led the pack.
Data by YCharts
Insert coin to continue
As we wrap up our analysis, we have to mention ESPO’s other notable characteristics. Please see the chart below for ESPO’s country allocation.
VanEck
Less than half of the assets invested are in US companies, and as such only 47% of the portfolio is denominated in USD. As the fund is unhedged, this presents currency risk for investors.
However, investment in non-U.S. equities could be appealing to someone looking to add a foreign allocation to his or her portfolio and willing to assume this type of risk.
Presently tech is running hot as QQQ continues to break all-time highs. ESPO, as a tech sub-sector, doesn’t have nearly the same momentum.
Below is an outline of Seeking Alpha’s ESPO ratings.
Seeking Alpha ESPO
In this case, we tend to agree with the Seeking Alpha Quant Rating of “hold,” with a leaning towards “sell”. One of ESPO’s saving graces here is that its weighted average P/E ratio is 24.1 next QQQ’s is 31.1. This could possibly mean the portfolio is undervalued and has more room to run or at least experience a relatively soft landing in a downturn.
As always, we can’t predict exactly where the gaming sector is going to end up, but we definitely see growth in its future. Choosing the right vehicle to best follow that trajectory depends on the focus of the investor. If you’re particularly bullish on the video game sector, are willing to assume currency risk, and want some general exposure to gaming, ESPO might be a good option. However, for investors who want to narrow in on a specific aspect or type of gaming, another fund that does such would be a better bet. As such, we have chosen a “hold” rating for ESPO.