You may have noticed that online betting and gaming excitement seems to be taking over our television sets and media devices. Every time I turn on the TV these days, I see commercials from the likes of DraftKings, Flutter Entertainment's (FLUT -0.99%) FanDuel, MGM Resorts International's BetMGM or William Hill Sports Betting.
As an activity, online betting and gaming may or may not grab your attention, but as an investor, it might interest you to know that online gambling is a massively growing market, to the tune of a projected $130 billion by 2027, based on a compound annual growth rate (CAGR) of 11.5%, according to Grandview Research. That is more than double the current market size.
Image source: Getty Images.
Stretch the field
But with so many gaming companies, casinos, and online betting options, it takes a great deal of research to identify which companies will fit nicely into a three- to five-year investment plan, and which might cause you a higher degree of risk or possible anxiety. One great way to alleviate some of that risk is to provide yourself with a larger playing field, such as an exchange-traded fund (ETF), which has holdings in multiple companies.
It works similar to a mutual fund, but can be traded intraday similar to individual stocks. Two examples include the Roundhill Sports Betting & iGaming ETF and the VanEck Vectors Gaming ETF.
The Roundhill Sports Betting & iGaming ETF (BETZ) focuses on a portfolio of globally listed companies actively involved in the sports betting and iGaming industry. This includes in-person and online sportsbooks, online gambling platforms, and companies that provide infrastructure or technology to companies providing the platforms and services.
The table below lists the top six holdings, in order, from largest to smallest asset weight -- between 4.3% and 3.8% in the BETZ portfolio -- along with year-to-date returns for each holding and for the fund as a whole.
| Stock | Asset Weight | YTD Returns |
|---|---|---|
| Roundhill Sports Betting & iGaming ETF (BETZ 0.34%) | Full | 16% |
| Entain (ENT -3.09%) | 4.3% | 10% |
| PointsBet Holdings Limited (PBTH.F 4.29%) | 4.2% | Flat |
| DraftKings (DKNG 4.96%) | 4.1% | Flat |
| Kindred Group | 4% | 67% |
| Flutter Entertainment (FLUT -0.99%) | 4% | (18%) |
| Rush Street Interactive (RSI 1.85%) | 3.8% | (38%) |
Data source: fidelity.com. Holdings and returns as of May 17, 2021.
As you can see from the table, BETZ has a year-to-date return of 16% for investors. However, only two of the top six holdings have resulted in positive returns through nearly five months into the year, one of which is also lower than the BETZ return. That's not to say that the individual stocks won't pan out over the course of the next three to five years for long-term investors, but should they pan out it will also likely increase the returns for the ETF as a whole, providing investors with an alternative to individual stock investing and a way to potentially minimize the risk.
Ownership in BETZ does not come with complete freedom from risk, however. BETZ has only been around since June 2020, so there is minimal tracking history, and it comes with an expense ratio of 0.75%. This means that any net returns for investors would be minus the 0.75% deducted by Roundhill. There is also potential risk that may be associated with international markets and sector exposure. Currently only 37% of all BETZ holdings is in U.S. companies, with additional exposure in countries such as the U.K., Malta, Australia, and Sweden. The sector exposure is weighted toward consumer discretionary at 68% of holdings, while communication services is second at 7%.
Lean on veteran players
The second ETF to take a look at as a potential to minimize risk is the VanEck Vectors Gaming ETF. This ETF follows closely the MVIS Global Gaming Index, which tracks the overall performance of companies that generate 50% of revenues from gaming, including casinos, online gambling, racetracks, lotteries, and gaming technology and equipment.
BJK has been around since 2008, which provides a bit more comparison history. Its five-year average annual return is 14%, trailing that of the S&P 1500 Consumer Discretionary index by 5%. However, over the past year BJK leads the S&P 1500 by 17%. As of this writing, DraftKings and Flutter Entertainment are included in its top six holdings just like the BETZ ETF. However the remaining top four all differ.
The following table can be used as a reference to see how the BJK ETF might help your portfolio to minimize risk while enjoying the reward of positive returns in a growing market. In this table, I've added Asset Weight for a slightly different comparison perspective.
| Stock | Asset Weight (as a % of all holdings) | YTD Returns |
|---|---|---|
| VanEck Vectors Gaming ETF (BJK 0.34%) | Full | 13% |
| Evolution Gaming Group (EVO) | 9.5% | 73% |
| Flutter Entertainment (PDYPF) | 7.8% | (18%) |
| Las Vegas Sands (LVS -0.22%) | 6.8% | (2%) |
| DraftKings | 6.5% | Flat |
| Galaxy Entertainment Group (GXYEF 0.34%) | 6% | 5% |
| Aristocrat Leisure Limited (ALL -2.12%) | 5.7% | 18% |
When looking at the total year-to-date return of the BJK ETF, you can see that 13% provides better performance than four of the top six holdings. You can also see that the best performing returns were associated with a company with the largest asset weight. By comparison, the worst-performing holding in the top six has the second-highest asset weight. Basically, investors who own share in BJK benefit from the huge returns of Evolution Gaming, which they may or may not own as an individual stock, but its returns are enough to offset losses by four of the other six.
Be your own MVP
If investors follow sound advice and perform the necessary research to invest in solid companies with a three- to five-year plan in mind, it can go a long way toward a successful and profitable portfolio. Investing in an ETF in an industry expected to grow at an 11.5% CAGR for the next six years might provide an alternative for those who prefer to play on a larger field with hopes that it will give investors more opportunities to score.
