Another ETF Avenue For Video Game Access

With the video gaming industry ascending to stratospheric heights (by some estimates $152 billion this year), issuers of exchange traded fund are meeting investor demand for nuanced funds focusing on that growth. One of the newer entrants to that fray is the Defiance NextGen Video Gaming ETF VIDG.

What Happened

VIDG, which tracks the BlueStar Next Gen Video Gaming Index, a modified cap-weighted index with a heavy emphasis on the hardware (consoles) and software (game publishers) sides of the video game business.

Those are compelling opportunities for investors because new games are among the pistons powering the industry and a major console upgraded cycle is forecast for 2020 as Microsoft MSFT and Sony SNE release new versions of Xbox and PlayStation.

VIDG allocates 3.14% of its weight to Microsoft, making it one of a small number of funds with video game exposure to put the software giant among its top 10 holdings.

Why It's Important

In addition hardware makers, important drivers of VIDG's price action are well-known software makers, such as Activision Blizzard ATVI, Electronic Arts EA and Take-Two Interactive Software TTWO.

“We expect companies with high-quality franchises and development capabilities will continue to attract large audiences, and further fragmentation of distribution should generally prove positive for the economic moats of the four game publishers we cover: Activision, EA, Take-Two and Ubisoft,” Morningstar said in a recent note.

Activision, EA and Take-Two combine for over 15% of VIDG's weight, according to issuer data.

What's Next

For investors looking to take a long-term view of video game ETF like VIDG, exposure to the higher end software publishers is an important factor to consider because those companies have legacy franchises, customer loyalty and some pricing power. Activision, EA and Take-Two fit those bills.

“We believe the video game publishers we cover are fairly valued to undervalued despite our neutral view, relative to the market’s positive view, concerning the impact of subscription plans and cloud gaming and our slightly higher concern level about the potential of the regulation of microtransactions,” Morningstar said. “We prefer Activision Blizzard given its more diversified revenue by platform, strong core franchises, and potential upside from its larger exposure to esports.”

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