by Tim Maloney / January 14, 2019
Competitive gaming, also known as “esports” or electronic sports, has recently come into the focus of investors across the globe. You’ve likely heard of Epic’s latest round, or that Bob Kraft and Michael Jordan have bought into an esports team. It probably feels like investing in esports is only for the wealthy—those who can make private market investments. We hope to change that perception.
You've likely heard of Epic's latest round, or that Bob Kraft and Michael Jordan have bought into an esports team. It probably feels like investing in esports is only for the wealthy—those who can make private market investments. We hope to change that perception.
Video games have played an important role in our (and most of our generation’s) lives from a young age. I could bore you with personal anecdotes from Will’s and my past, but I bet you have just as many you would rather reminisce about. Fast forward to today, we’re breaking from the path well-traveled within financial services to create something that we believe people want. Roundhill Investments was founded with a single goal in mind: bringing esports to the investing public.
As is turns out, the ecosystem surrounding esports is relatively diverse. Importantly, there are a number of publicly traded companies that have exposure to the ecosystem in different ways. With that in mind, we began our quest to build an index of the publicly traded companies with the most exposure to the growth in esports.
So what problem does the Roundhill BITKRAFT Esports Index solve? Right now, investing in esports is challenging. There are three main problems:
Wouldn’t it be nice if you could buy the “entire market” of esports related companies? That’s what we’re creating. Our index will serve as the benchmark for financial products catering to those who believe esports will continue to grow and want to invest in that belief. Before we dive any deeper into what the index does and how it might be used, let’s walk through the esports ecosystem.
We define esports as competitive video gaming in front of a viewing audience, which includes amateur and professional video game streaming, as well as physical events, tournaments and leagues. It’s a broader definition than a purist might use, but we feel it’s prudent to zoom out and see the bigger picture. In doing so, we end up with a few types of companies.
The first segment that comes to mind are the game publishers. Without them, there would be no games to play at all, let alone play competitively. A few of these publishers are very active in driving the growth of esports for their titles (e.g., Activision Blizzard) and are thus an important part of our index. Other game publishers take a more hands-off approach to esports and are thus not included in our index.
Next are the media creation and distribution companies, most notably the streaming network operators. A few of the more popular streaming platforms are owned by massive tech companies (e.g., Twitch by Amazon and YouTube Gaming by Google), and as such are not included in our index—at least, not yet, as other businesses are driving their stock price. Other streaming platforms, like the Chinese company Huya, are included, thus offering exposure to this essential component of the ecosystem.
Hardware companies are key, too. This includes companies that make the actual systems, like laptops and consoles, and those that make important peripherals, including gaming gear, headsets and keyboards. As with the game publishers, how a company approaches the competitive scene will influence how we view the company, as will the size of its esports presence compared to its overall business—looking at you, Microsoft.
Then there are sponsors, whose investments are a critical driver of growth. A key distinction we make when evaluating sponsors is whether they are endemic (i.e., native to esports) or non-endemic (i.e., foreign to esports). A company that creates products used by esports athletes and offers sponsorships, like Turtle Beach or Razer, is linked to esports at its core. On the other hand, a company that sponsors teams and tournaments, like Monster Beverage, would not be considered an esports company given that its core business is selling energy drinks.
A unique feature of esports is the competitive infrastructure, including tournament and league operators and competitive team owners. As with sponsors, the companies involved here often fall into another category (e.g., game publisher, media company, hardware developers)—which we take into consideration when looking at each company’s relevance to esports. In the future, there may be publicly traded companies for whom tournament, league, and/or competitive team ownership is the primary business—they will likely fit the bill.
Our index is the first step in making investing in esports accessible. Our index tracks what we believe is a collection of companies that represent the esports industry. It will be rebalanced every quarter to update the holdings and ensure we are keeping up with industry trends. In addition, we may enact special rebalances upon the announcement of certain corporate actions (i.e., a merger or an initial public offering) relevant to the space.
Unfortunately, the investing public cannot “buy” an index. An index, however, can serve as the basis for other products investors can buy. We intend to create a product ourselves in the near future that will be investable for many. In addition, we may license our index to other third parties who may do the same.
Investing in products that attempt to track the performance of our index is not going to be for everyone. As with any financial decision, it’s important to take into consideration broader circumstances before acting. Moreover, it’s possible the components of our index will exhibit higher volatility than broader market indices like the S&P 500. This comes with the territory of investing in a fast growing sector.
**Please note a more thorough disclaimer can be found on our website, roundhillinvestments.com**
We’re hard at work launching a product people can buy. For more information, check out our website at www.roundhillinvestments.com. If you want to stay informed, please sign-up for our newsletter. You can also find us on Twitter (@roundhill) and LinkedIn (Roundhill Investments). And if you want to get in a round of Fortnite with us…