The world of thematic ETFs is an interesting one, you can find the most curious ETFs to invest in, from Cannabis, Video Games and Diversity to Space Race, Travel, Hydroegen and AI and other disruptive technologies. We could write a very long list with so many interesting options that never ends. However, In this article we have asked some of the ETFs managers to talk about their curious ETFs, and to explain how their products fit in the market, Global X, VanEck, HANetf and Etfmg.
Global X Video Games & Esports ETF
Video Games & Esports – Video Games & Esports: Building on 2020’s Rapid Growth
Pedro Palandrani, AVP, Research Analyst
A number of events accelerated the video game industry’s growth last year. The pandemic pushed at-home activities like video games to the forefront of entertainment. The same happened with esports, which came to the rescue with live content while in-person sports and events were on pause. New console releases, a number of new hit titles, and the rise of community/social gaming also contributed to the growth. As a result, industry revenue totaled $175 billion in 2020, a 20% increase from 2019.
As pivotal and successful as 2020 was, we believe that it was just part of the industry’s growth journey, and not its destination. The industry has several growth opportunities ahead which could prove to drive outsized returns for investors over the long run.
We expect video game companies will continue to refine their products and innovate across multiple areas in 2021. Video game revenue is expected to grow to $189 billion in 2021.7 But top-line improvement may not be the be-all, end-all story this year. Video game themes will likely move into new stages of development, for example, as companies’ digital distribution becomes more pronounced, Free-to-Play (F2P) games create new and more robust communities of gamers, and the mobile segment’s popularity increases.
- Digital Distribution, a Margin Profile Booster: Today, approximately 83% of total video games sales are digital (excluding mobile revenues because those are virtually 100% digital). Publishers such as Activision Blizzard, Ubisoft, Electronic Arts, and Take-Two Interactive can benefit from digital distribution because physical distribution requires manufacturing, shipping, packaging, and wholesaling with third parties, all factors that negatively impact margins.
- Free-to-Play (F2P) When Free Becomes Sales: Now one of the most popular gaming segments, F2P games immerse gamers into titles for free and then seek to monetize their experience once they become attached to the game. Monetization occurs when gamers pay for new downloadable content (DLC), such as maps or missions, and microtransactions (MTX), such as extra lives and skins, which are purely aesthetic changes to the appearance of characters. F2P is increasingly important for companies. For perspective, over 50% of leading publisher Activision Blizzard’s revenue, which includes the Call of Duty and Candy Crush franchises, came from these DLC/MTX channels in 2020.
- Social Gaming, Early Days of a Metaverse: As we look at the future of video games, enabling social experiences seems to be a core trait of successful titles. Video games are now effectively social media platforms that let gamers play and collaborate with one another. For companies, social gaming translates into greater engagement and greater monetization opportunities. Activision Blizzard CEO Rob Kotick mentioned recently that, on average, Call of Duty players who play in groups with friends spend over three times more hours in the game and invest roughly three times more on in-game content compared to other players.
The Global X Video Games & Esports UCITS ETF (HERU) seeks to invest in companies that develop or publish video games, facilitate the streaming and distribution of video gaming or esports content, own and operate within competitive esports leagues, or produce hardware used in video games and esports, including augmented and virtual reality.
VanEck Vectors Hydrogen Economy UCITS ETF
Martijn Rozemuller, Managing Director & Head of Europe at VanEck Europe
Why ETFs are the way to back the hydrogen mega trend?
As green hydrogen evolves as a solution to climate change, so a specialist ETF diversifies investment risks across the emerging companies.
VanEck Vectors Hydrogen Economy UCITS ETF (HDRO), invests in companies related to the Hydrogen economy, with a global focus, giving access to an energy source of the future and that can make sense in an ESG or Thematic portfolio.
Amid concerns about global warming, different governments have committed to a future without carbon emissions and Hydrogen is part of the solution as it is a powerful and clean source of energy, which can be generated using renewable energy.
The ETF has started on March 26 and already has around 50m USD in AUM. The ETF is made up of the 25 largest companies in the sector and none of them can weigh more than 8% in the portfolio for greater diversification.
Just 15 years from now, it’s likely that “green” hydrogen will be an essential part of our daily lives. The EU and other governments have placed the colourless, odourless gas at the centre of plans from combatting climate change, alongside electrification taking the place of fossil fuels.
Think trains, trucks, buses, ships and aircraft, as well as district heating, power and essential industry such as steelworks. As governments move from pledging zero-carbon goals for their economies by 2050 to turning this into a reality, so they and private businesses see hydrogen as a major part of the solution.
The growing use of hydrogen, therefore, looks like a mega trend with long-term investment potential, benefiting the businesses producing the gas, as well as making electrolysers and fuel cells. But there are plenty of risks with any fast-emerging young industry, especially when judging which companies will emerge as tomorrow’s hydrogen giants and which might falter.
In circumstances like these, we believe that a widely diversified investment approach is the wise way to proceed. Similar to the venture capital model, which spreads risk across a portfolio of young companies, profiting substantially from the winners, an ETF is able to do the same.
8% annualised growth forecast
With climate change now the world’s defining challenge for the next 30 years, hydrogen looks may play a part in replacing fossil fuels in ways that electrification cannot. Its high energy density makes it more suitable than electricity for powering anything especially heavy, such as aircraft and ships.
Importantly, ‘green’ hydrogen is produced with renewable electricity and so does not contribute to greenhouse gas emissions. The other major form of hydrogen is ‘grey’, which is generated using fossil fuels and will need to be phased out.
The EU, especially, is putting hydrogen at the centre of its plans for energy transition. To give a sense of the likely growth in production, the Hydrogen Council expects that hydrogen will reach 13-24% of the global energy mix in 2050, up from just 2% in 2018, growing at an annualised compound rate of 8%.
Spreading your risk
In many cases, the technology is in place for hydrogen to be deployed, but in others it will take years. It’s already technically possible, for instance, to use blended hydrogen to heat buildings. Similarly, it can be used as fuel for buses, trains and passenger ships. But it’s unlikely to propel freight ships or aircraft until 2030 at least.
All of this means that while the investment prospects of backing hydrogen may be significant, there are risks. These relate to the development of new technologies, their implementation and subsequent adoption in the marketplace. In order to offer investors a low-cost way to spread risks, we launched our new VanEck Vectors Hydrogen Economy UCITS ETF (HDRO)
The EU is expecting that in little more than a decade hydrogen will power travel, heat and. By then it seems fair to assume that some of the companies behind this mega trend may have grown to be household names, the equivalent of today’s energy giants.
HANetf The Medical Cannabis and Wellness UCITS ETF
Nawan Butt, Portfolio Manager
In today’s world, economic growth has become increasingly confined to rising productivity levels, which are a direct function of increasing technological applications. In recent years however, an industry once left behind, is now playing regulatory catch-up and fast becoming one of the fastest growing consumer-oriented sectors on a global basis.
The Medical Cannabis and Wellness UCITS ETF (CBDX) provides thematic exposure to a long-ignored sector which is experiencing fast regulatory reform all over the globe with a current focus on the US but also with a growing global supply chain. CBDX focuses on 4 main verticals if this industry including: medical cannabis, CBD wellness, pharmaceutical cannabinoids and the ancillary services that provides the infrastructure for the supply chain. CBDX does not allocate to the adult-use cannabis vertical, which has been slower for regulatory reform and is only Canada centric within the realm of developed markets.
Cannabis reform in one way or another has been topic du jour for regulators since 2017 when Canada passed broad legalization. Currently, over 40 countries around the world (including over 20 in Europe alone) provide some level of access to cannabis and the trend is very much in a progressive direction towards further liberalization. Medical cannabis penetration rates are measured regularly between 1%-4% for more mature programs, which alludes to the incredible potential of an untapped market. The industry already employs over 400,000 people in the US alone and according to a recent study, is expected to add $92B of economic impact to the US economy in 2021 alone. The economic, health care and social impacts of this industry are demanding regulator attention and becoming core part of forward-looking political agendas.
The medical cannabis vertical makes use of the plant’s active ingredients to provide for treatment against impacts of many illnesses and helping patients cope with anxieties, pains, and nausea. CBD wellness, uses the nutraceutical elements of the plant to provide ingredients for cosmeceutical products such as skincare. Pharmaceutical cannabinoid companies take a precision approach in an effort to provide medication for specific illnesses such as Epidiolex by GW Pharma to help control childhood epilepsy. And the last vertical of ancillary services brings together all the suppliers for the industry experiencing robust growth as a derivative of cannabis growth. These four verticals make-up the basic structure of the industry and are the best way to position for the growth of the industry as well.
Parallel growth-oriented industries are focused on heavy upfront infrastructure/technology costs and an ever-rising customer acquisition cost, which means that profits are further away and therefore have lower return on investment on a simple time value of money basis. In cannabis however, although infrastructure costs may be high the return on investment is immediate as customer acquisition costs are low. The initial stages of growth in this industry are based on a simple channel change; instead of running through illicit channels, consumers are being guided to legal channels without increase in cost or effort. Economic growth potential from cannabis is much lower hanging fruit vs the more mainstream technology trade.
ETFMG Travel Tech ETF (AWAY)
Play the Travel Boom with the AWAY ETF
Sam Masucci, CEO of ETFMG
The ETFMG Travel Tech ETF (AWAY) is the first ETF to give investors access to the technology-focused global travel and tourism industry. AWAY is a portfolio of companies that are a subset of the global travel and tourism industry. These companies are engaged in the “Travel Technology Business” by providing technology via the internet and internet-connected devices to facilitate travel bookings and reservations, ride sharing and hailing, travel price comparison, and travel advice.
AWAY, which is up 48% over the past year and up 22% YTD, tracks the Prime Travel Technology Index, designed to measure the performance of technology companies that are working to usher in a new era of global travel and tourism. The Fund’s Index currently has exposure to travel bookings and reservations (51.91%), ride sharing and hailing (12.96%), travel price comparison (16.27%), travel advice (18.54%).
The travel sector, largely decimated in 2020 by the global pandemic, has gotten a proverbial “shot in the arm” so far in 2021 resulting from widespread COVID vaccinations. The rise in vaccinations appears to be in line with a variety of positive leading indicators for the travel industry.
Looking ahead, it is widely expected to have a years-long travel boom to result from pandemic related measures. Regional and domestic travel will likely be the quickest to rebound while the return to international and business travel will have a slower, incremental rollout. According to a Trip.com SEC filing, the global travel market is expected to increase from $4.7 trillion by the end of 2021 to $7.1 trillion by the end of 2025, growing at a CAGR of 10.6% for the period.
Top holdings in AWAY include Hana Tour Service, Expedia, Trivago and Uber, to name a few.