This article is a part of InvestorPlace’s Best ETFs for 2018 contest. Robert Waldo’s pick for the contest is the ETFMG Video Game Tech ETF (NYSEARCA:GAMR).
As we close in on the end of the year, it’s starting to look like my pick for InvestorPlace’s Best ETFs for 2018 contest — ETFMG Video Game Tech ETF (NYSEARCA:GAMR) — won’t be coming out on top. Currently down 1% year-to-date, the GAMR ETF has gone on a crazy ride and it is now ranked No. 7 out of the ten ETFs in the contest. However, even if it comes up short, I still believe the video game ETF can end 2018 in the green, and I still believe in its longer-term potential.
If you’ve been following my past few articles on the GAMR ETF, then you’ve already got the basics for my opinion: Several catalysts, including esports and general mainstream exposure via popular streaming platforms like Amazon’s (NASDAQ:AMZN) Twitch and the Chinese variant, Huya (NYSE:HUYA), should continue to propel the popularity of video gaming for years to come. The shift from physical to digital also offers an interesting opportunity, as gaming becomes just as convenient and simple as watching a movie on Netflix’s (NASDAQ:NFLX) streaming platform. Meanwhile, some potential for video game ETFs still exists in virtual reality (VR), despite it being a less-talked-about catalyst.
All of this longer-term potential is supported by the strong backbone of a growing number of gamers worldwide. That’s one aspect of GAMR that I did not fully address with my previous entries on the video game ETF.
The holdings in this ETF are primarily based in consumer cyclical businesses. That means GAMR will generally ebb and flow with consumer consumption, and although there are plenty of long-term catalysts to be bullish about, they won’t necessarily be fully realized in video game ETFs until much further down the road. So, for now, some of the shorter-term movement seems to solely rely on gamers’ purchasing habits, which can be erratic and unpredictable at times.
Although GAMR isn’t a pure video game ETF and it does hold some hardware companies that are involved in other industries (think Nvidia (NASDAQ:NVDA) with autonomous vehicles), its primary allocation (51%) is in video game software companies like Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI). And lately, some of the massive hits from these companies that we’ve been anticipating have been duds. Or, in some cases, like with EA’s Battlefield V, their launches have stuttered, while behemoths like Fortnite continue to grow.
The GAMR ETF Will Grow as the Industry Evolves
Of course, if you pay close attention to how the video game industry has evolved over the years, the reliance on big-time hits is becoming less significant than before, and instead, long-term monetization has become a key aspect. As such, the significance of short-term struggles of some software companies is becoming increasingly hard to gauge, as a flop could still turn out to be profitable in the long run.
But in the minds of investors, the lack of instant success can be daunting, especially when it’s a repeat occurrence like with EA’s Battlefront 2 fiasco (where gamers threw a fit due to an unappealing micro-transaction system at the game’s launch) and now issues with the company’s Battlefield V game (where there’s a cultural divide in its prospective user base over social justice issues, among other pre-launch hurdles). Regardless of whether you agree with the validity of these grievances, it’s clear that these occurrences with EA reflect a potential disconnect between the company and its customers.
Just as it will take time for the gaming industry to experience its long-term growth catalyst in esports, it will also take time for the industry to adapt to its diversifying demographics. And, clearly, the games that we all expect to be mega hits aren’t always guaranteed to succeed. EA might be struggling to identify with some gamers now, but it’s safe to assume that the company will try not to continue similar mistakes in the future.
Bottom Line on GAMR
Even though the industry is shifting toward a focus on long-lasting monetization and investors shouldn’t rush to judgement if a game release doesn’t instantly produce the expected results, these software companies remain consumer cyclical businesses, and people still expect immediate, impressive sales numbers to get hyped. Given that expectation, there’s still hope for a solid holiday bump in the GAMR ETF at the end of 2018.
Although some video game companies like EA have experienced a slump, you can expect other big GAMR holdings to succeed this year. Consider Take-Two Interactive (NASDAQ:TTWO) with its upcoming release of Red Dead Redemption 2 on Oct. 26. Rockstar Games, the developer behind Red Dead and the insanely popular Grand Theft Auto series has always delivered the goods with its releases. There’s also ATVI’s Call of Duty: Black Ops 4, which will likely steal Battlefield V’s thunder and Nintendo’s (OTCMKTS:NTDOY) Super Smash Bros. Ultimate, which will likely help sell more Switch consoles this holiday season.
And there are also a few new consoles like the PlayStation Classic, that should give video game hardware and software companies like Sony (NYSE:SNE) a nice boost at the end of the year, as gamers’ fascination with retro gaming continues to drive sales of relaunched, old-school consoles.
Likewise, the advent of video game streaming subscription services (similar to Netflix) should prove to be beneficial to several video game companies in the months ahead. Microsoft (NASDAQ:MSFT) recently launched its Xbox All Access subscription, which essentially lets gamers rent-to-own an Xbox One or Xbox One X console, and gain access to a large library of downloadable games from all Xbox generations. The longer-term impact of such services on the industry is still to be determined, but it currently holds great promise, along with all of the other catalysts I’ve been touting for the GAMR ETF.
Robert Waldo is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.