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I had a discussion over the phone with Will Hershey, CEO of Roundhill Investments, a few days back regarding Roundhill’s new E-Sports and Digital Entertainment ETF (NERD). Although this ETF is rather unknown and quite a small ETF, we do think it has significant potential and probably deserves more attention, especially from investors interested in the e-sports industry.
What is the NERD ETF?
NERD isn’t really focused on e-sports per se, but on the trend of watching others play video games. This can include professional twitch streaming, watching influencers play on YouTube, and other similar activities. Since most public gaming companies aren’t completely or even mostly exposed to e-sports, NERD tries to identify companies with significant exposure to e-sports and allocates a portion of its portfolio to these stocks.
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Which stocks really have e-sports exposure?
It can be hard to tell which company has e-sports exposure, but NERD has that covered. Will explained that NERD uses an algorithm that scans company filings for the mention of e-sports, and uses that info along with sector classification and other data points to give each stock a score of how much e-sports exposure it has. This determines the weighting of that stock in the portfolio.
Me, being skeptical, asked Will about CD Projekt Red’s [WSE:CDR] 4%+ weight in the portfolio. I knew the company was famous for its Witcher games, which were single-player, and had another upcoming single-player game, Cyberpunk 2077, so I was curious why it was such a significant holding in NERD’s portfolio.
Turns out that Will knew more about this firm than I thought. He explained that the company had an e-sports division in Europe called Gwent. He then elaborated by saying that since CD Projekt Red didn’t have a significant amount of e-sports exposure, NERD’s holdings of CD Projekt Red weren’t as high as some of its other holdings.
Although many of NERD’s companies aren’t 100% involved in e-sports, most of them are gaming companies, and e-sports tends to help drive gaming awareness in general and vice versa, so the two industries are significantly correlated.
NERD gets exposure to e-sports through three methods – Media, hardware, and games. Media refers to companies that offer direct viewership of e-sports, hardware refers to gaming hardware companies that help sponsor e-sports teams, and games refer to game developers companies that have exposure to e-sports.
Why an ETF?
One of the things I was most curious about was – Why use an ETF for investing in e-sports? Aren’t the best e-sports companies private?
Will told me that this wasn’t always the case. Apparently, some teams are being sold for 30-40x revenues, which is a pretty insane valuation for such a volatile revenue source. Investing in privately-held e-sports companies also requires the investor to be accredited and the market is also much less liquid, making this asset class much more difficult to access for normal investors. It also requires a lot of capital, and investors may not be able to diversify as much, which further restricts this asset class.
Also, unlike other gaming ETFs, NERD is more focused on the e-sports side of things instead of on gaming companies. Some of its largest holdings are rather unknown but more specialized companies like AfreecaTV which don’t appear in the holdings list of most gaming ETFs.
Partners and industry experts
One of the most impressive things about NERD is that despite its low AUM, it has managed to garner a pretty impressive panel of experts.
There’s Jens Hilgers, who founded BITKRAFT Esports Ventures, a $125mil private equity fund that invest in e-sports. He was also the CEO of ESL, the largest e-sports company in the world, from 2000 to 2015.
There’s Chris Chaney, who served as director of Infinite Esports and Entertainment, which invested in teams like OpTic Gaming or Houston Outlaws, some of the largest e-sports teams in the world today.
Rob Zacny, the third expert, has covered e-sports for over 10 years as a journalist and has worked with a major e-sport sponsor and organizer.
I don’t think it would be farfetched to say that these people most likely know the industry in and out. For an industry like e-sports which moves faster than most industries, it helps to have insiders that know what is going on and can act accordingly.
As an example of how quickly this team can spot trends, Will told me that the team had spotted Sea Ltd. (NYSE:SE) in 2018 and had included it in the BITKRAFT Esports Index as early as late 2018. Sea has tripled in the last year. Although other investors may know Sea by its Garena gaming platform, the team was instead looking at its new hit game, Free Fire, which now has over 450mil users.
Value Proposition
NERD is for smaller investors who want exposure to e-sports and gaming without paying the huge brokerage fees required to buy stocks in other countries. It helps that NERD seems to have a great panel of experts that understand e-sports really well and can spot trends faster than most investors.
Currently, NERD only charges a 0.25% expense ratio until June 30, 2020, when it will double to 0.5%.
Unlike alternative ETFs like VanEck’s ESPO (ESPO), NERD is much more focused on e-sports, and we think it’s the best e-sports ETF on the market currently.
Takeaway
Overall, we like NERD a lot. It has a solid value proposition and allows investors to invest in a fast-growing industry. It invests globally and management seems quite passionate about gaming (Will told me he plays Apex Legends). This seems like a great ETF for those who want e-sports exposure.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NERD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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