ESPO ETF: Question & Answer

• How do you define Video Games and eSports Companies?
• What companies are eligible for inclusion in the ESPO ETF?
• What is the long-term outlook for the Video Game and eSports sector?
• What are the threats to the industry?
• What is the projected growth of the industry?
• What are the major trends in the industry?
• Who are the industry leaders?
• What is the global vs. regional market exposure of ESPO?

How do you define Video Games and eSports Companies?

Video game and eSports companies are defined as companies which generate at least 50% of their revenues from:

• Video game development
• Gaming software or hardware (processors, graphics cards, controllers, headsets, consoles)
• Offering streaming services
• Developing games or hardware used in eSports events
• Being directly involved in eSports events as league operators, teams, distributors, or platforms

What companies are eligible for inclusion in the ESPO ETF?

The ESPO ETF’s objective is to track the performance of its underlying index, the MVIS Global Video Gaming and eSports Index (MVESPOTR). This global index tracks the performance of the largest and most liquid companies in the video gaming and eSports industry, ranking them by free-float market cap. Companies such as Nintendo, Capcom, and Electronic Arts rank amongst the fund’s top 10 holdings – and diversification is built in with an 8% max weight to any given company in the fund portfolio.

What is the long-term outlook for the Video Game and eSports sector?

Global macro conditions are ideal for synergistic growth within the gaming/eSports industry; long-term sentiment is positive and attracts attention. Emerging markets continue producing an organic growth rate of new players joining PC and consoles. eSports are also gaining global momentum, debuting as a medal event at the 2023 Asian Games last fall¹ and set for the first eSports Olympics in 2025. Younger generations raised online remain engaged as they age with strong user retention. Annual developments in tech, like Apple’s new Vision Pro headset, directly impact the gaming industry, allowing innovations in user experience and immersion. Developers are already implementing the exponential advancements in AI capabilities to make games more hyper-realistic.

What are the threats to the industry?

The industry’s path to future growth might be riddled with short-term volatility. Layoffs have persisted well past 2021; Tech was not the only sector prone to over-hiring through the pandemic, and lagging effects are expected to continue into 2025. Artificial Intelligence proves to be a double-edged sword; while being able to maximize productivity for developers, live actors and game performers have now become obsolete with GenAI’s capabilities to capture real emotion and lifelike detail in characters.

Gaming is also attracting significant interest from major players like the Mag7. Microsoft acquired Blizzard Studios for a landmark $68 billion in 2022, and Netflix is currently beta-testing its new cloud gaming service with a new gaming boss hired from Epic Studios. Even Disney’s Bob Igor expressed his interest in a piece of the pie, announcing their $1.5B investment into Epic Games this February. Saudi Arabia’s Public Investment Fund is also pushing into the industry, with its subsidiary Savvy Games Group operating as an esports platform and acquirer, already amassing $37.9B AUM since inception.

What is the projected growth of the industry?

The global video games market is projected to grow from $187B in 2024 to $213B by 2027². To put this into perspective, in 2022, the gaming industry raked in an estimated $184B, far surpassing music ($26.4B) and movie ($26.2B) industry revenues combined. Some key factors include:

The number of gamers worldwide is expected to reach 3.32 billion, with Asia reaching 1.48 billion and Europe following with 715 million. Emerging economies are an important factor in the future growth of the gaming industry. As these regions experience increased internet penetration and higher smartphone adoption rates, a brand new audience is gaining access to gaming. This expansion is further supported by the rollout of affordable 5G networks, which enhance connectivity and allow for high-quality gaming experiences without the need for expensive hardware.

Growth is shifting from West to East following younger demographics. Niko Partners' 2023 study tracked the growth of the Asia and MENA (Egypt, Saudi Arabia, UAE) regions in the gaming market: By 2028, these hotspots are expected to host nearly 2 billion gamers, up from 1.6 billion last year. About 50% of the internet population in Saudi Arabia are already regular gamers. As part of its Vision 2030 plan, the country aims to establish 250 gaming firms and produce over 30 top 300 titles by 2031. The International Olympic Committee (IOC) has also partnered with Saudi Arabia to host the Olympic Esports Games for the next 12 years³.

What are the major trends in the industry?

The future of the video gaming and eSports industry is shaped by several key trends, with mobile gaming leading the charge. Mobile gaming is poised to contribute nearly half of the global gaming revenue, driven by the expanding mobile app ecosystems and the impact of global antitrust legislation like the EU’s Digital Markets Act. This shift encourages companies like Epic Games and Microsoft to expand into mobile platforms while consumer brands and IPs leverage mobile gaming through strategic partnerships and in-game experiences. Emerging markets in the Asia-Pacific region, particularly China, India, and Indonesia, are set to dominate the global gaming landscape, with significant growth expected in both mobile gaming and eSports, supported by improved internet infrastructure and the popularity of free-to-play models.

Additionally, advancements in AI and VR are set to revolutionize the gaming experience, enabling more efficient game development and enhanced player immersion. AI tools are streamlining the development process, from automating bug fixes to enabling more dynamic in-game interactions. VR is evolving with innovative hardware like the Virtuix Omni treadmill and Apple’s Vision Pro. These technologies are enhancing the gameplay experience and expanding the capabilities of game developers and hardware manufacturers. As these trends converge, the gaming and eSports industry is poised for significant growth and innovation in the coming years.

Who are the industry leaders?

The gaming industry is dominated by well-known global conglomerates such as Sony, Microsoft, Nintendo, Tencent, and Electronic Arts, all of which maintain steady product launches and planned releases through 2026. In the console gaming market, Sony's PlayStation, Microsoft's Xbox, and Nintendo's Switch are the top contenders, with Sony's PS5 leading in sales at 39.9 million units as of September 2023. Nintendo is set to launch a new Switch model in 2025, while improved versions of the PS5 and Xbox are anticipated in late 2024, highlighting the ongoing competition and innovation in the console segment.

Console Sales (2022-Present)

Source: vgchartz.com as of 2024.

Financially, Tencent leads the industry with $7.4 billion in revenue, followed by Apple and Sony, generating $3.6 billion and $3.4 billion, respectively. Other top earners include Microsoft, NetEase, and Google, all ranking highly on Newzoo’s 2023 global games report. Despite their high revenue rankings, companies like Apple, Microsoft, and Google derive most of their earnings from non-gaming segments, underscoring the dominance of dedicated gaming companies like Sony and Tencent in the industry. This financial landscape highlights these companies' global influence and their significant role in shaping gaming's future.

Source: Newzoo as of May 2024

What is the global vs. regional market exposure of ESPO?

ESPO’s portfolio exposure is 36.78% US and 63.22% global as of July 31st, 2024.

Country Exposure % of the VanEck Video Gaming and eSports ETF

Source: Vaneck, Morningstar as of 7/31/2024.

¹ Perspectives from the Global Entertainment and Media Outlook 2024-2028.

² Newzoo’s Global Games Market Report 2024.

³ IOC announces Olympic Esports Games to be hosted in the Kingdom of Saudi Arabia.