You Don’t Need to Be a Fat Cat to Cash In on the $1.1B Esports Industry

Until recently, only those with access to company founders could invest in esports. Now, that's changing.

Source Composite by Sean Culligan and Images, Getty

Why you should care

You can watch esports — and watch your money grow with it — now.

On a scorching Saturday in Queens’ Flushing Meadows Park, thousands of sweaty teenagers rushed through the New York City subway turnstiles into a winding queue for entry into Arthur Ashe Stadium, America’s most famous tennis arena. But they weren’t there for the U.S. Open. It was July, and 23,700 fans were packed in for the inaugural Fortnite World Cup.

Weeks earlier, leaders of a company called Roundhill Investments donned hats embroidered with the word “NERD” while ringing the closing bell at the New York Stock Exchange. In June, they had debuted financial products called exchange-traded funds (ETFs) focused on esports. Roundhill’s products, known by the acronym NERD, offer investors exposure to 25 companies (video game developers, digital streaming platforms, event companies and other players in the space) that they otherwise would not have been able to reach. Their target? The thousands of fans at Arthur Ashe Stadium and the millions more in esports-literate younger generations.  

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Fans follow the final of the solo competition at the 2019 ‘Fortnite’ World Cup at Arthur Ashe Stadium in New York City.

Source Johannes EISELE / Getty

Just three years ago, average investors interested in esports had no such entry point to the market. Extremely wealthy investors with direct access to an esports company’s fundraising could capitalize on the soon-to-be billion-dollar market. But retail investors? No chance. Now, thanks to NERD and three other exchange-traded funds (ETFs) that have launched on the New York Stock Exchange — VanEck Vectors Video Gaming and eSports ETF (ESPO), Video Game Tech (GAMR) from ETF Managers Group and Video Gaming and eSports (VIDG) from Defiance Next Gen Video Gaming — that’s finally changing.

There’s this old guard of traditional finance companies not catching up to the trend.

Tim Maloney, Roundhill co-founder

These ETFs are hoping to cash in on skyrocketing interest in esports. In 2018, people watching other people play video games — via streaming platforms like industry giant Twitch — measured in the hundreds of millions. Video game competitions like the Fortnite World Cup, which drew an estimated 2.3 million concurrent viewers across Twitch and YouTube, reach a global audience of 454 million, with at least 190 million more expected to be watching in three years.

“The amount of eyeballs on [the esports] space from this younger demographic that is traditionally very hard to reach is tremendous,” says Roundhill co-founder and chief investment officer Tim Maloney. “Similarly, there’s this old guard of traditional finance companies not catching up to the trend.”

Some gamers are making more than many athletes, and sponsorship, advertising and media rights have almost doubled since 2017 to $897 million. In total, global revenue for esports will reach $1.1 billion this year, up 27 percent from 2018, with North America accounting for 40 percent of the total amount. So, of course, traditional fat cat investors like Ted Leonsis, Dan Gilbert and Stan Kroenke have jumped at the opportunity to buy esports teams. Meanwhile college arenas are being built, and pop culture icons like Drake, Jennifer Lopez, A$AP Rocky and Michael Jordan are all swarming the space. 

It makes sense for casual investors to want some skin in the game too. “We’re entering a new era with multiple younger generations of investors looking for opportunities in emerging markets — markets that they understand,” says Dan Bylsma, portfolio manager at KKM Financial. “Many younger retail investors understand these opportunities better than traditional markets.”

GAMR, which launched in 2016, follows the EEFund Video Game Tech Index and holds roughly 60 securities — a majority of which are in technology hardware, home entertainment software and internet software provider companies. GAMR currently has an estimated $83 million assets under management. Similarly, VanEck’s ESPO ($39.5 million assets under management) tracks an index that emphasizes the emerging esports market alongside more traditional video game holdings. 

“This completely new form of entertainment and the video game industry it has grown out of are upending traditional sports and entertainment,” Ed Lopez, head of ETF product at VanEck, told reporters following ESPO’s one-year anniversary in October. “Fortnite skins have replaced baseball cards, Twitch streams have replaced the Game of the Week.” 

Which is exactly why Roundhill Investments is going all-in on esports alone. In addition to having the coolest ticker on Wall Street, Roundhill’s ETF is the first fund to focus solely on esports. NERD tracks companies that are “tying themselves to a shift in consumption patterns of the next gen of investors,” says Maloney. 

Roundhill’s targeted approach in an emerging market comes with risks. It likely means that five years from now, NERD will either be a rocket ship or will have fizzled out. With $10 million assets under management, Roundhill needs to hit on the 25 companies that NERD tracks in order for the fund to survive. Just as important, says Maloney, is Roundhill’s ability to connect and resonate with young generations of investors. The idea to found Roundhill came in December 2017, at the height of the cryptocurrency craze that saw Bitcoin climb to $19,891 before a crash. Fundamentally, that moment in crypto history was a lesson in bad investing. But Maloney and CEO Will Hershey — who both graduated from Vanderbilt University in 2011 and have worked for large Wall Street firms — also saw millions of young investors who were, many for the first time, passionate about an opportunity that they understood better than any stock or bond index. 

“There’s a young generation of investors that the establishment is not reaching,” says Maloney. “That’s a generation that is building wealth, and we think the traditional [financial services companies] are going to have a hard time serving customers that they don’t understand.”

Unlike most financial services companies that avoid social media entirely, Roundhill is reaching out to young investors on platforms like Twitter, Instagram, Twitch and LinkedIn. TikTok might just be next.

Sure, this all might feel a bit extreme. But if streaming and esports really is the future of sports content, it might be time to take those bitcoins to a nearby retail investing platform. You no longer need to be a fat cat to invest in esports.

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