The novel coronavirus froze the domestic sports calendar, but sports betting stocks are scorching hot. Now they have a home in the form of the newly minted Roundhill Sports Betting & iGaming ETF (NYSEARCA:BETZ). The BETZ ETF is the first exchange fund dedicated to the fast-growing sports wagering and internet casino markets.
BETZ is the newest addition to the growing batch of thematic ETFs, some of which are credible while others stretch the bounds of relevancy and investors’ taste. From a moral standpoint, some market participants may have equivocations with gambling in any form, but that doesn’t assail the relevance of bets. Plenty of investors are focusing on the opportunity set offered by the fund.
BETZ celebrates its one-week birthday on June 11. It already has $75.4 million in assets under management, a staggering sum for a fund of this age from an independent issuer.
First mover advantage is often meaningful in the ETF space – BETZ clearly has that – but thematic funds need to offer investors a valid approach to a relevant theme. BETZ has those traits, too, because the fund features broad exposure to seismic shifts in the gaming industry.
Looked at differently, the old guard casino business is being disrupted by technology, but many related investments don’t adequately capitalize on that trend.
BETZ does. The new fund follows the Roundhill Sports Betting & iGaming Index. According to Roundhill, that benchmark features:
“Companies who are actively involved in the sports betting & iGaming industry. This classification includes (i) companies that operate in-person and/or online sports books (ii) companies that operate online/internet gambling platforms and (iii) companies that provide infrastructure or technology to such companies in (i) or (ii).”
Timing Matters, Too
Another issue confounding many news ETFs is timing. I’ll use what could eventually prove to be a real-world example: Earlier this year, an issuer filed plans for a work-from-home ETF. It’s not out yet and by the time it does come to market, there’s a reasonably good chance many Americans will have returned to their offices, potentially weighing on the relevancy of the fund.
Conversely, BETZ is the beneficiary of good timing. Interestingly, some of that good timing stems from Covid-19. During the multi-month shutdown forced by the virus, states’ collection of gas, sales and yes indeed, gaming taxes, were imperiled. Now coffers are running light, prompting some analysts to say more states will approve internet casinos and/or sports betting as avenues for generating revenue.
That’s a potential boon for a slew of BETZ components, including DraftKings (NASDAQ:DKNG), Penn National Gaming (NASDAQ:PENN) and William Hill (OTCMKTS:WMHY), just to name a few.
Another reason BETZ is the beneficiary of good timing is the phrase “asset-light model.” Among the many things Covid-19 exposed in financial markets is how rapidly investors can turn on companies carrying mountains of debt with high operating costs. That’s particularly true of brick-and-mortar casinos, venues that in some instances can cost $2 million or $3 million a day just to open the doors.
Asset-light is a major reason investors are fawning for DraftKings stock and looking at the broader BETZ roster, the fund is home to just three companies that operate physical casinos.
The Bottom Line on the BETZ ETF
BETZ holds 30 equities right now, with the largest holdings being DraftKings (6.7% of the fund), Flutter Entertainment (OTCMKTS:PDYPY, 6.2%), and Pointsbet Holdings (OTCMKTS:PBTHF, 5.8%). BETZ has an expense ratio of 0.75%, or $75 annually for each $10,000 invested.
Investors considering BETZ need to know that iGaming and sports wagering are in the early innings of growth and as such, there will be some bumps in the road. For example, DraftKings isn’t yet profitable.
Second, there’s regulatory risk in the form of states moving slowly to approve or not approving at all online casinos, sports gambling or both. On a related note, recent history proves that it can be a long time from approval to the first sports bet being placed in many states.
However, the markets addressed by the Roundhill fund remain tantalizing. Estimates run as high as $20 billion apiece for the respective market sizes of online casinos and sports betting over the next several years, assuming more than 30 states come online. That kind of growth could be BETZ a bet worth making.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he has a small position in DraftKings.