Two ETFs To Stream eConnectivity Into A Portfolio

I just discovered a tool for assessing the ubiquitousness of a new social-cultural trend: Spellcheck! I noticed, as I experimented with various titles to this post, that spellcheck did not cue an error for eConnectivity. I knew about eSports and eBooks, but wasn’t sure how far that sort of thing had gone. I tried, eBanana, eSewer, eSpellcheck, eHurricane, eCrazy, and more. OK. So the eWorld is a real thing. But I know it’s not a mature played-out thing: I was using the Apple Pages word processor. When I tried it on Microsoft Word, everything (except eSports and eBooks) was flagged for error. That the supposedly grown-up word processor hasn’t yet caught on suggests investors can still treat this as a secular growth theme.

© Can Stock Photo / ryanking999

If At First You Don’t Succeed . . .

I started with the idea of drawing some sort of `new investment idea from the current news cycle which, for reasons I’m sure I need not enumerate, is about as bold as any I’ve seen in a long time. I settled on what surely had to be a winner; the likely surge in ad spending as we ramp up toward the 2020 Presidential Election as both sides work hard to get their respective messages across. This is not a new theme. I used to cover broadcasting stocks and the political ad-spending cycle was a recurring conversation. 

I had high hopes for this topic. I know all about Healthcare, Technology and Communications. I’ve written about them. I’m well invested in these areas. Now, I wanted something new and fresh, and something that could work whether or not we have a dreaded second wave of coronavirus.  (That eliminated Industrials and Consumer Discretionary, which had gotten some good press lately.)

I searched on PortfolioWise and found the Invesco Dynamic Media ETF (PBS) (ETF Home). It’s in the right area. It owns the right names. And it comes up Bullish in our Power Rank model. Assets Under Management is small, microscopic practically. I can tolerate that for an ETF that owns shares of liquid equities. But studying some older price charts, I saw that the election theme, however it may have manifested in quarterly earnings for relevant companies, did not translate all that well into stock price trends. Oh well.

. . . Try, Try Again — And Succeed

I can’t remember my full step-by-step process: Let’s just call it free-from meandering due to quarantine-induced boredom (I’m in New York City; we just limped into Reopening Phase 1 and the Governor threatened demotion if we keep overstepping that; he literally tweeted “Don’t make me come down there”). But it turned up two very interesting ideas: Social Media and eSports.

Social Media as a whole is definitely not new. Who doesn’t know about YouTube, Facebook, Instagram, Twitter, and even Snapchat. And they’re getting bigger and bigger with livestream, and interactive video chatting. But that’s a drop in the bucket. There’s TikTok, Twitch, Discord, Zynn (a TikTok competitor: Who knew?), WeChat, WhatsApp, Patreon and all the others out there I haven’t yet found and/or which are in the process of being invented. Some are directly investable as pure plays. Others are not. Some are but will cease to be if/when they get acquired in the future. All, at least all I’ve logged into, sell advertising, and voila, we’re back where we started at my original quest for potential beneficiaries of political ad spending. I’m not sure how good a this is to these platforms (some definitely, others maybe not) but demand surges and price bumps elsewhere (like broadcast and cable TV, and possibly Facebook) may push non-political spenders elsewhere, perhaps to social media. One more thing: As these platforms push harder and harder for better user experience, they demand more technology, which creates another set of investment opportunities.

eSports and the video gaming industry from which it evolved . . . oh boy. That’s a whole different thing. I get video gaming. I did time on PacMan, Asteroids, and even tried running a few plays on John Madden football before realizing it was way too complicated for me. And, of course, I did the obligatory screaming at my son who preferred gaming to homework. Meanwhile, my skull still aches from all the eye-rolls I did back when I was at Reuters and the company made a big deal about setting up a currency exchange on Second Life. I also knew gaming got a lot bigger from watching out of the corner of my eye as a former colleague at Portfolio123, talked of adventures and exploits in World of Warcraft (or something like that; it’s all the same to me). But it’s a good thing I never laid a bet on this being just a fad. Turns out that would have been as smart as betting against the viability of the internet.  Not only do I see that this stuff is for real, I also see people can turn pro and make a living competing in eSports leagues. Add that to those who make careers as social media influencers, and . . . and . . . actually, I haven’t figured that out yet, but I know it’s for real

And, by the way, there does seem to be some synergy between eSports and Social Media. I learned of Twitch when someone explained it was a platform on which people could watch and interact with gamers as they played. My first reaction: Seriously? But, as I soon discovered, this is a thing, a real thing, a big thing.

Two Investment Ideas

Since the mid-2000s, I’ve often marveled at Wall Street’s creativity in churning out ETFs. Not every idea has been a winner, but there are plenty of good things out there for those willing to look beyond the de-facto standard S&P 500 SPDR ETF (SPY)(ETF Home) and the like. Here are two that hit today’s themes, both from Global X, a firm about which I need to learn more.

Probably to the surprise of nobody, many of the stocks held in both ETF portfolios have very high valuation ratios. That alone, is not a deterrent. Rather than valuation ratios being ends unto themselves, they are part of a comprehensive picture that necessarily includes expectations of future growth and company quality (business risk). The Chaikin stock Power Gauge model (part of the ETF Power Rank) is a 20-factor model that gives stocks with poor valuation metrics opportunities to show, based on growth and/or quality considerations, that the valuations are acceptable in these instances. 

This is not an easy hurdle. Many big-name widely-admired richly-valued so-called growth names fail to show enough in other categories to rise above Neutral, and still retain Bearish ranks. But in these particular portfolios, enough stocks make sufficiently strong growth/quality showings to get their overall ranks up to Neutral or Better. We can see this Table 1, which shows sub-ranks ranks (0-100; 100 is Best) for some of our model’s factors.

Table 1 (Click here for Factor definitions)

Global X Video Games and eSports ETF (HERO) (ETF Home)

The foregoing images are courtesy of from PortfolioWise – Powered by S&P Global Market Intelligence/ClariFi

As ETFs go, this is a very concentrated portfolio with 49% of assets allocated to the top four positions. I criticized that sort of thing recently with Growth and broad-market ETFs. But this time it’s different (yeah, THAT phrase we all love to hear).

The ETFs I panned were supposed to be passive no-decision buy-the-market investments, Now, I get that true passivity doesn’t really exist. You’re at least deciding something if you choose to track the S&P 500, or a growth sub-set of a major index. It’s a matter of degrees. Indexing is about limiting one’s self to broad high-level choices rather than the nitty gritty issues uniquely impacting specific stocks. If an ETF being purchased by those who think they’re indexing is, say, 40% invested in just a half dozen FANMAG or FANMAG-like stocks, there’s no way to avoid the impact of company-centric risks.

HERO isn’t like that. For these stocks, we want to deal with the company specifics. 

Strictly speaking, HERO is passive; i.e., it passively tracks an index. But the index is not at all general. The major intellectual property here is in the way Global X working with Solactive (its index provider) identifies themes worth pursuing, stocks suitable for each of the themes upon which ETFs are based, in this case eSports. Among the top four holdings, Activision Blizzard (ATVI) and Electronic Arts (EA) seem like no-brainers. But the other two, Sea Limited (SEA) and NetEase (NTES) are diversified operations that focus on Asian markets. So much the more so for a position like Nvidia (NVDA), where it’s not so obvious at first glance how much of the business is tied to eSports. It takes some analytic work to identify these as appropriate for an eSports portfolio and to weight them appropriately (market capitalization but subject to maximum limits on any single security).

Active, passive, who cares. The topic is largely obsolete in my opinion. I want eSports exposure and I’m happy to ride along with Global X as a supplier. The management fee is not cheap, but as in all walks of life, we pay for services rendered. I don’t expect a specialty provider to compete with the likes of Vanguard when it comes to pricing the latter’s gigantic plain-vanilla funds. As long as HERO can give me a good net (after fees) return, I’m satisfied.

Global X Social Media ETF (SOCL) (ETF Home)

The foregoing images are courtesy of from PortfolioWise – Powered by S&P Global Market Intelligence/ClariFi

Much of what I said above about HERO applies as well to SOCL. 

The major investment-characteristics difference between these themes is that social media is a bit more mature. And I can’t believe I just typed that. What must it say about the state of our world when I dare characterize social media as more mature than anything, except, perhaps, things like autonomous vehicles, or vacation resorts on Mars (don’t hunt for stock tickers, this doesn’t actually exist — yet). But even with the supposed relative maturity I assume, just watching how social media has evolved in the past few years, I think it’s safe to suggest that in 20-or-so years, the best of what we have nowadays will be viewed the way we look at DOS today (if you don’t know what DOS is, Google “Disk Operating System”). 

Once again, I’m fine paying Global X (a management fee even higher than that for HERO) to make this theme investable more effectively than I can do on my own.

Conclusion

ETF offerings by Global X as well as ARK Invest, an outfit discussed recently in a blog by my colleague Dan Russo and further back by myself are interesting examples of how the ETF industry has evolved beyond its generic beginnings. I see fund offerings like these as great ways to build core-satellite portfolios in which the core may be something like a basic 60/40 type equity/fixed-income allocation and the rest aimed at specialty ideas.

Holding disclosure … Long HERO, SOCL

#eSports #SocialMedia #ETFs #GlobalX $HERO $SOCL

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