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Beware Of This Video Gaming ETF Which Holds A High Weightage Of GameStop After Its Meteoric Rise

GameStop is affecting not just individual investors but those who invested in certain ETFs.


This article is republished with permission from iFast.

  • GameStop’s (NYSE: GME) shares have soared 1784% year-to-date, as millions of small retail investors egged on by social media bought up its shares and call options.
  • GameStop’s current share price is irrational as the company is a struggling video game retailer stuck in a legacy business.
  • GameStop has also temporarily taken over some ETFs, such as the Wedbush ETFMG Video Game Tech ETF (NYSE: GAMR) as its weighting grew from just 3.7% to a whopping 17.3% in a matter of days.
  • Investors who wish to invest in the video gaming space should be cautious of GAMR, given its heavy allocation to the highly volatile GameStop.
  • Investors who are seeking exposure to the video gaming industry may consider the Global X Video Games & Esports ETF (NASDAQ: HERO)Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSE: NERD) or the VanEck Vectors Video Gaming and eSports ETF (NASDAQ: ESPO) instead.

 

What has been going on with GameStop’s share price?

It has been a manic month. GameStop began the month of January at a share price of USD 17.25, but the stock kept shooting higher, eventually hitting a high of USD 347.51 as of 27 January 2021 (Figure 1).

Figure 1: GameStop’s share price has risen immensely

The frenzy hit new heights on Thursday (28 January 2021) when several trading platforms limited their customers from buying shares of GameStop. GameStop eventually gave back a chunk of its gains and finished the day at USD 193.60, down 44%. But as of 29 January 2021, the share price is still up 1784% year-to-date.

However, it isn’t GameStop precipitous rise which has the world fascinated. Instead, it’s what’s propelling the rise. As a result of Gamestop’s failing business, it was one of the most shorted stocks by institutional investors, a fact that was picked up by a number of retail investors on social media platforms such as the now infamous Wallstreetbets (which now has over 7 million subscribers) on Reddit.

These users came up with the idea to convince enough people to buy up GameStop stock, in a conscious collective effort to drive the share price up. The move was intended to trigger a short squeeze and cause hedge fund managers to incur heavy losses.

Why the current share price is irrational?

There is no denying that GameStop is a struggling retailer. The company is a mid-size retailer stuck in a legacy business of selling physical video games at its brick-and-mortar stores, at a time when consumers are increasing moving towards buying video games online. With GameStop’s business being disrupted, it is not surprising that the company has been shutting down stores and making losses.

As such, GameStop’s current share price is irrational. The company is simply unable to generate enough earnings to justify its more than USD 20 billion market cap, and there is absolutely no good reason why a long-term investor should buy this stock.

The share price rally is purely speculative in nature, and is largely disconnected from the fundamentals of the company. At some point, people are going to realise that the fair value of GameStop is actually much lower than its current price, and this could potentially lead to a collapse in share price – much like what happened during the dot-com bubble.

How GameStop has hijacked ETFs

When a situation like this occurs, it naturally has an impact on the wider market. As a matter of fact, GameStop has taken over some ETFs that hold it. Among the most heavily affected is that of Wedbush ETFMG Video Game Tech ETF (NYSE:GAMR), the only video-game ETF in the market with exposure to GameStop.

GAMR seeks to track the performance of the EEFund Video Game Tech Index. The index is designed to reflect the performance of companies involved in the video game technology industry, including game developers, console and chip manufacturers and game retailers.

As of now, GameStop is the GAMR’s top holding (Table 1). The company’s weighting in GAMR grew to a whopping 17.3% from just 3.7% a few days ago. The weightings are based on GameStop’s closing price of USD 325 on 29 January 2021.

Table 1: Top 10 fund holdings of GAMR

Top 10 fund holdings Weightage
1)      GameStop Corporation 17.26%
2)      Bilibili Inc 2.74%
3)      Pearl Abyss Corporation 1.88%
4)      IGG Inc 1.85%
5)      Codemasters Group Holdings 1.73%
6)      Keywords Studios PLC 1.73%
7)      Capcom Co Ltd 1.71%
8)      Embracer Group AB 1.69%
9)      Zynga Inc 1.68%
10)    Activation Blizzard 1.65%

Source: Bloomberg Finance L.P, iFAST Compilations

Data as of 29 January 2021

For the time being, Gamestop will continue to have an outsized weighting in GAMR at least until demand for its shares dies down or the fund rebalances. GAMR rebalances on a quarterly basis, and will be due for a rebalancing in March.

What should investors do?

For now, investors who wish to invest in the video gaming industry should be cautious of GAMR. Unlike other video gaming ETFs available in the market, it has heavy exposure to GameStop and a massive reversion in share price may be on the horizon.

Investors who are seeking exposure to the video gaming industry may want to consider the following ETFs instead. The top picks based on our ETF selection methodology is that of: The Global X Video Games & Esports ETF (NASDAQ: HERO), followed by Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSE: NERD) and VanEck Vectors Video Gaming and eSports ETF (NASDAQ: ESPO).

All in all, it is difficult to prevent people from pushing a stock too high and potentially burning themselves in the process. With this in mind, investors should look to other ETFs without any exposure to GameStop to minimise their risk.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in any of the abovementioned securities.