Esports is a big business.
According to the Entertainment Software Association (ESA), there are nearly 227 million players in the U.S. across all age ranges. The global industry is expected to grow to $398.95 billion by 2026 at a compounded annual growth rate (CAGR) of 11 percent.
Esports, a subsection of the industry, is projected to grow to $6.82 billion by 2027 from $1.48 billion in 2020.
There are two exchange-traded funds (ETFs) focused on this industry: HERO and NERD. Each holds a different portfolio of esports and video gaming investments, and they’re attractive for investors interested in the industry.
But which is better between the HERO ETF vs NERD?
What Stocks Are in the Global X Hero ETF
Global X is a New York City-based ETF provider with $40 billion in managed assets. It was founded in 2008 and bought by Mirae Asset Global Investments for $488 million in mid-2018. In 2019, it launched the Global X Video Games & Esports ETF (HERO).
Today, it holds $497 million in net assets across 40 investments.
Its top holdings by market price are Nvidia Corp (NASDAQ:NVDA), Sea Ltd (NYSE:SE), Electronic Arts (NASDAQ:EA), Netease (NASDAQ:NTES), and Take-Two Interactive (NASDAQ:TTWO). Combined, they account for 35.03 percent of the portfolio.
These holdings belong to four sectors: Communication Services, Information Technology, Consumer Discretionary, and Industrials. Companies located in the United States and Japan account for 55.3 percent of the ETF. The price-to-earnings ratio of 35.77 this year is a large increase from 25.18 in 2020.
What Stocks Are in the Roundhill Bitkraft NERD ETF
Roundhill Investments is a registered investment advisor and ETF sponsor with a slew of thematic ETFs. Bitkraft is a global venture capital investment platform for esports, gaming, and interactive media. Together, they created the Roundhill Bitkraft Esports & Digital Entertainment ETF (NERD).
The ETF holds over $85 million in net assets across 37 investments within the Roundhill Bitkraft Esports Index.
Top holdings by market price are Krafton (KRX:259960), Afreecatv (KOSDAQ:067160), Tencent Holdings (OTCMKTS:TCEHY), Douyou International Holdings (NASDAQ:DOYU), and Huya (NYSE:HUYA). Together, they account for 22.11 percent of the portfolio.
It has a 0.50 percent expense ratio and focuses on games, hardware, and media. The U.S., China, and South Korea account for 57.1 percent of the holdings, and the companies have a $6.5 billion median market cap.
Both ETFs track the gaming industry, so let’s dissect that industry next.
Video Game Industry = 227 Million Players
According to the Entertainment Software Association, there are 227 million video game players across the U.S., and they span all age ranges. Both men and women play games, at a 55/45 split with an average age of 31 years old.
The U.S. video game industry has been on a growth trajectory for the past decade and will reach over $65 billion in 2021. This is slightly higher than 2020’s all-time high of $66.88 billion, although the global gaming market grew to $175.8 billion and is expected to reach over $200 billion by 2023.
Mobile gaming and esports are two major niches within the industry, and we’re in the ninth console generation. The economic shock of 2020 sparked a surge in the gaming industry as people were quarantined at home en masse around the world.
This pushed the industry to all-time highs and produced for investors a healthy profit, but there’s no guarantee the good times will continue at record pace.
Is HERO ETF a Good Buy?
HERO has a wide spread of investments across sectors, and it outperformed the VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO) over the past year. Nevertheless, it has some big-name investments that don’t feature in NERD, including NVIDIA (NASDAQ:NVDA) and Nintendo (OTCMKTS:NTDOY).
With a beta of 0.57 against the S&P 500, HERO is an attractive investment with low relatively volatility. It doubled in price since its 2019 launch, and it could double again even faster with the current trajectory of the esports industry. But how will it compare to NERD?
Is NERD ETF a Good Buy?
NERD is four months older than HERO. Unlike its counterpart, it has not quite doubled in price yet. HERO slightly outperformed it over the past two years.
The investment in Corsair Gaming (NASDAQ:CRSR) separates NERD from other esports ETFs. Its beta of 0.83 makes it more volatile than HERO, but it’s still more comparably more attractive than the S&P 500.
Both ETFs have been flat over the past year, however, and that highlights the risks of investing in this industry.
Although esports is a growing industry, it stalled in 2021 as the world hung between lockdowns and recovery. Both ETFs are down double digits from their peak toward the end of the year. This makes it difficult to recommend for investors seeking immediate profits; by contrast, a long-term investor can be quite comfortable letting the industry CAGR pay off.
The U.S. gaming market struggled to show any gains from the prior year when it reached an all-time high of $66.88 billion. This downturn could be a sign that the market has reached full penetration and may not have as much growth room as expected.
HERO vs NERD ETF: The Bottom Line
The esports industry is booming, and this has investors seeking the right place to put their money. Both HERO and NERD provide exposure to the sector. HERO is about 8x larger in terms of AUM so arguably that gives investors more confidence that it’s got a proven track record at scale.
Both ETFs are down from their all-time highs and have 10 to 20 percent growth potential over the next year. If you want the lower beta opportunity, that’s HERO also. Finally, NERD missed out on holding NVDA, a massive winner, and that could be another reason to lean towards HERO.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.