Main Thesis / Background
The purpose of this article is to evaluate the VanEck Vectors Gaming ETF (BJK) as an investment option at its current market price. This is a broad casino/gaming fund, with an objective to track an index consisting of companies involved in casinos and casino hotels, sports betting, lottery services, gaming services, gaming technology and gaming equipment. This was a fund and sector theme that I was bullish on as 2021 got underway, and that turned out to be a mistake. After initially registering some strong gains, the tide quickly turned against it and the gaming arena was an under-performer for most of the year. In fact, over the past year, BJK has seen a negative return, despite the S&P 500 soaring:
Clearly, recommending/buying this fund has been a mistake and one I wish I didn’t make. That said, as we begin the new year, I wanted to take another look at BJK to see if it warrants an optimistic look in 2022. My current position is in the red, so it may be time to dollar-cost average on the long-term potential.
Unfortunately, after review, I see continued headwinds on the horizon for the gaming sector, which makes me reluctant to “double down” on this play. While I don’t want to sell-off here, since a turnaround is possible, I am not confident enough to add more to my position. If the broader market corrects, or BJK registers a sharp drop, I may find some value. But at current prices, this fund is a “hold” for me now, and I will explain why in detail below.
What’s Gone Wrong? Covid
To begin, I want to discuss some of the reasons why BJK has been lagging the market. This is critical because, as I will demonstrate, these attributes are clouding the outlook at present as well. So the problem is that the negative forces BJK faced in 2021 are also impacting the fund as 2022 gets underway.
The first of these is not surprisingly the pandemic. One of the positives that I found with BJK is that it combined both e-gaming potential with traditional brick and mortar casino names. This allowed me to get exposure to the growing trend of online sports betting and casino wagering, especially in the U.S., as well as around the world. But it also allowed more traditional exposure, to names like MGM Resorts (MGM) and Wynn (WYNN), which are established names in the space. I liked this combination, and felt it helped reduce the concentration risk that a pure e-betting fund would give, such as Roundhill Sports Betting & iGaming ETF (BETZ). For a list of the fund’s holdings, see the graphic below:
The problem here is that the pandemic, and associated lockdowns/restrictions, have gone on for longer than anticipated. As we kick-off 2022, countries are enacting more restrictions, not less, and this is hurting discretionary leisure and travel plays. As a result, the more traditional names like those mentioned above, are suffering.
Worse, we cannot expect this to turnaround immediately. While travel in the U.S. has been fairly resilient, an investment in BJK is a global play, given the exposure this sector and the underlying companies have to Asia through Macao. The Chinese authorities have been more restrictive than the U.S., in terms of quarantine rules and isolation periods, and this has hurt overall spend on the island. Further, there are signs that this is not going to let up during Q1, with omicron cases exploding across Asia, in areas like China and Hong Kong. The inherent issue is many of these cases are originating from imported infectious people, which gives the government all the more ammunition to enact additional travel restrictions:
My point here is that a macro-issue that has pressured BJK over the last calendar is set to do the same in early 2022. This backdrop has kept BJK from delivering gains, and it seems the pandemic is going to create similar problems in at least Q1, if not longer. This ultimately supports my more modest, neutral view on the fund at this time.
What’s Gone Wrong? E-Betting Profitability
A second sore point for BJK relates to the e-gaming aspect of the fund. When the U.S. Supreme Court ruling in 2018 opened up the door for states to allow sports betting within their borders, the potential was huge. Through the end of 2021, more than a dozen states have begun to offer wagering, with the most recent addition being New York in the short-term.
At present, about half the states in the country are in some phase of legalization, and popular online sports books like DraftKings (DKNG) and FanDuel (owned by Flutter Entertainment (OTCPK:PDYPF)) are making big pushes in to those areas:
In this view, things are going to plan. The U.S. opened up the door, states walked through it, and customers are eagerly placing their bets. In this environment, why has BJK suffered, and not soared?
The answer lies primarily in the cost of customer acquisition. In a rush to gain market share and attract punters, the sportsbooks have aggressively begun to compete with one another, offering very lucrative sign-up promotions especially. This has made what should be a very lucrative business turn in to a model that is struggling to actually turn a profit.
To see why, consider that a quick internet search for a would-be gambler pulls up multiple promotional offers, as shown below:
Of note, this list is not exhaustive, there are more out there, which highlights a key reason for lack of profitability.
Beyond this, readers should realize these are not “one and done” promotional opportunities. Most of these sites have ongoing offers, such as profit boosts, deposit matches, risk-free bets, etc. It has turned a sure thing for online bookmakers in to a short-term losing venture. While I believe in the longer term story of this sector, the short-term has been a disappointment because of the lack of restraint, number of entrants, and the fact that half of U.S. states still have not legalized this arena.
This is especially relevant for the time being because investors are looking to take some risk-off the table. While the major indices have held up relatively well in 2022 so far, the stocks and sectors that have been punished are the ones with lofty valuations and/or are seen as more risky plays. For example, cryptocurrencies, tech stocks, and companies that don’t make a profit (like DKNG) have all been on the chopping block. This is not unique to just sports betting / gambling plays, as shown below:
The conclusion I draw here is that investors want profits and relative value at the moment. Sports wagering plays do not offer either, despite being laggards in 2021. This lack of investor enthusiasm and momentum is another reason for my downgrade from the “bullish” outlook I used to have.
Canada Is A Big Opportunity
Of course, the story is not all bad. While I highlighted some problems and continued headwinds, readers should note I am keeping my position in BJK. There is potential in this fund, and the broader gambling sector. As travel resumes, resort and casino plays will directly benefit. As we near the college March Madness basketball tournament, that should be a boon for online wagering. Finally, as more states and territories open up to legalization, revenue (and eventually profits) are bound to grow.
Another point to keep in mind here is this is not just a domestic, U.S. play. While I mentioned Macao earlier, the growth in online wagering extends beyond America. While legalization has been commonplace in other developed markets in Europe, the U.K., and Australia, it was stymied in North America. Now that the U.S. has pushed forward, Canada has similarly followed suit. Just like in the U.S., the government there is letting provinces come up with some of their own rules, so there is not national uniformity. This makes the picture is a little less clear, but there is still massive potential. This is because Canada is a growing, developed country, and the standard of living there and wages are quite high. In fact, in a recent report out by Deloitte, the consultancy firm is expecting Canadian sports betting to grow exponentially in the years to come, exceeding $28 (Canadian) in around five years time:
The thought here is that even though promotional gimmicks and high customer acquisition costs are a major headwind, in the longer term that will even out. The growth we have seen in America is encouraging for those who can withstand the shorter term volatility. As the market opens up in Canada as well, I would expect a similar pattern – initial losses but a path towards high profitability. This also allows investors a way to gain exposure beyond U.S. borders, while still investors in U.S. listed companies like MGM, DKNG, and Wynn, among others. I am happy to see any market open its doors up to online gambling, and the relatively wealthy Canadian sports fan is definitely a target I am optimistic about.
Mobile Betting Is Certainly The Future
A final positive point is just to emphasize the potential for this sector idea. While online and retail casino plays have been hampered by a host of reasons, the trend is still clearly in favor of this idea for the years to come. While wagering in North America was primarily restricted to retail, in-person (or black market) options, the opening up of mobile/e-gaming options has dramatically increased engagement. In the U.S., more and more people are turning towards this avenue to place bets, and the result has been a tremendous shift out of retail wagering. While this was to be expected to some degree, given the pandemic and ease of online wagering, the pace at which customers have moved to mobile is nothing short of breathtaking.
For perspective, consider that not only have the amounts of legalized wagers grown by leaps and bounds, but mobile betting has captured 84% of the market share in less than three years time, as shown below:
This hopefully illustrates clearly why I am not giving up on this investment. While the short-term pain has been unfortunate, and I still see some headwinds to overcome, the longer term story is simply that mobile betting is taking the country by storm. BJK offers investors direct exposure to this idea, without having to pick and choose a few stocks out of a bunch of names. As a result, I will keep this one in my portfolio and on my radar.
With 2022 underway, sports betting plays have yet to materialize as profitable ventures. This is a major headwind, and investors want some relative safety right now. Yet, the growth story is there, and those with a vision a few years out will want some exposure to these names. There could certainly be more pain on the way, and I wouldn’t expect out-performance any time real soon. This is why I am moving to “neutral” on BJK. Yet, this is a unique investment concept that exposes owners to a movement that is taking the sports betting world by storm. I expect to profit off this movement eventually, and will look to add to BJK on any major dips or weakness throughout 2022, with a mindset to profit off all the dollars currently being wagered on the internet.